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May 2018 Newsletter
- 1. Cedar Point Financial Services LLC® Todd N. Robison, CLU President 10 Wright Street 2nd Floor Westport, CT 06880 203-222-4951 [email protected] www.cedarpointfinancial.com May 2018 Newsletter The Standard Deduction and Itemized Deductions After Tax Reform Quiz: Can You Answer These Social Security Benefit Questions? What are the gift and estate tax rules after tax reform? How has tax reform affected the generation-skipping transfer tax? Cedar Point Monthly Newsletter Elegant solutions to complex financial issues What Is Critical Illness Insurance? See disclaimer on final page Have questions? I can help. Email Me: [email protected] Visit My Website: www.cedarpointfinancial.com linkedin.com/in/toddrobison Services: Estate Planning Retirement Strategies Executive Benefits Group Benefits CA License #0B77420 Critical illness insurance will pay you a lump sum if you are diagnosed with certain illnesses or injuries. Examples of illnesses typically covered by critical illness insurance include heart attack, life-threatening cancer, loss of a limb, and Alzheimer's disease. Often, loss of sight, a major organ transplant, and paralysis are also covered. You can then use the cash benefit to offset the decreased income or increased expenses associated with your illness. The lump sum is tax-free. Ironically, the need for critical illness insurance came about because people are living longer, even with serious diseases. But living a longer life also means people have more medical expenses that can deplete their health insurance and personal savings. Critical illness insurance helps pay for uncovered medical bills and household bills. Why consider critical illness insurance? Medical advances increase the chances that you will survive a serious illness that in the past may have killed you. But what are your chances of surviving financially, as well? Unfortunately, not good. Your illness or condition may last for years, but your savings account may not. It's likely that you will be unable to work while you're ill, so your income may decrease. In addition, your expenses may increase. You may have to pay medical deductibles and certain medical expenses out of pocket, pay for home health care and/or housekeeping, and buy equipment designed to make your life easier. The cash benefit you receive from a critical illness policy may help ensure that you have funds when you need them most. How can you get critical illness insurance? Critical illness insurance can be purchased as a stand-alone health policy, as part of a health insurance policy, or as a rider to a life insurance policy for an additional cost. Critical illness insurance associated with life insurance may be called critical illness life insurance (CILI). If it is purchased as part of a life insurance policy, benefits payable for a critical illness may reduce or eliminate the death benefit your survivors can receive and may terminate the policy. Policy provisions may vary The critical illness policy will specify the benefit face amount — the full cash benefit payable. The full benefit is payable upon diagnosis of certain conditions or illnesses. For instance, many policies pay 100% of the benefit face amount when a covered individual has a stroke, a heart attack, or kidney failure or is diagnosed with cancer after the policy has been in effect for a certain amount of time. The policy may also specify that only partial benefits are payable under other circumstances. For instance, some policies may pay 25% of the benefit face amount (e.g., $100,000) when you need to undergo a coronary artery bypass or when you are diagnosed with cancer before the policy has been in effect for a certain amount of time. You may also be able to buy a critical illness policy that will pay you full benefits up until age 65 and partial benefits thereafter. Things to consider If you are considering this type of insurance, it's vital that you understand exactly what is covered and what is not. The insurance will pay only if you contract the illnesses listed in the policy. Even then, further limitations will be defined in the policy. For example, what does the insurance company consider to be a life-threatening cancer? If you have a family history of a certain illness, will the policy exclude that illness? Are there pre-existing condition limitations? What are the age limitations? How much does it cost? Does the premium increase as you get older? When do you receive the lump sum? Is it really offering you more than your existing health plan? Finally, be aware that if you own one of these policies and never get sick, you won't get any money back. The cost and availability of life and health insurance depend on factors such as age, health, and the type and amount of insurance purchased. Also, a physical examination may be required at the time of application. Page 1 of 4
- 2. The Standard Deduction and Itemized Deductions After Tax Reform The Tax Cut and Jobs Act substantially increased the standard deduction amounts for 2018 to 2025. It also eliminated or restricted many itemized deductions for those years. You can generally choose to take the standard deduction or to itemize deductions. As a result of the changes, far fewer taxpayers will be able to reduce their taxes by itemizing deductions. Standard deduction The standard deduction amounts are substantially increased in 2018 (and adjusted for inflation in future years). 2017 2018 Single $6,350 $12,000 Head of household $9,350 $18,000 Married filing jointly $12,700 $24,000 Married filing separately $6,350 $12,000 Note: The additional standard deduction amount for the blind or aged (age 65 or older) in 2018 is $1,600 (up from $1,550 in 2017) for single/head of household or $1,300 (up from $1,250 in 2017) for all other filing statuses. Special rules apply if you can be claimed as a dependent by another taxpayer. Itemized deductions Many itemized deductions have been eliminated or restricted. The overall limitation on itemized deductions based on the amount of adjusted gross income (AGI) was eliminated. Here are some specific changes. Medical expenses: The AGI threshold for deducting unreimbursed medical expenses was reduced from 10% to 7.5% for 2017 and 2018, after which it returns to 10%. This same threshold applies for alternative minimum tax purposes. State and local taxes: Individuals are able to claim an itemized deduction of up to only $10,000 ($5,000 for married filing separately) for state and local property taxes and state and local income taxes (or sales taxes in lieu of income taxes). Previously, there were no dollar limits. Home mortgage interest: Individuals can deduct mortgage interest on no more than $750,000 ($375,000 for married filing separately) of qualifying mortgage debt. For mortgage debt incurred before December 16, 2017, the prior $1,000,000 ($500,000 for married filing separately) limit will continue to apply. A deduction is no longer allowed for interest on home equity indebtedness. Home equity used to substantially improve your home is not treated as home equity indebtedness and can still qualify for the interest deduction. Charitable gifts: The top percentage limit for deducting charitable contributions is increased from 50% of AGI to 60% of AGI for certain cash gifts. Casualty and theft losses: The deduction for personal casualty and theft losses is eliminated, except for casualty losses attributable to a federally declared disaster. Miscellaneous itemized deductions: Previously deductible miscellaneous expenses subject to the 2% floor, including tax preparation expenses and unreimbursed employee business expenses, are no longer deductible. Alternative minimum tax (AMT) The standard deduction is not available for AMT purposes. Nor is the itemized deduction for state and local taxes available for AMT purposes. If you are subject to the alternative minimum tax, it may be useful to itemize deductions even if itemized deductions are less than the standard deduction amount. Year-end tax planning Typically, you have a certain amount of control over the timing of income and expenses. You generally want to time your recognition of income so that it will be taxed at the lowest rate possible, and time your deductible expenses so they can be claimed in years when you are in a higher tax bracket. With the substantially higher standard deduction amounts and the changes to itemized deductions, it may be especially useful to bunch itemized deductions in certain years; for example, when they would exceed the standard deduction. Thus, while this might seem counterintuitive from a nontax perspective, it may be useful to make charitable gifts in years in which you have high medical expenses or casualty losses. In this environment, qualified charitable distributions (QCDs) may be even more useful as a way to make charitable gifts without itemizing deductions. QCDs are distributions made directly from an IRA to a qualified charity. Such distributions may be excluded from income and count toward satisfying any required minimum distributions (RMDs) you would otherwise have to receive from your IRA. Individuals age 70½ and older can make up to $100,000 in QCDs per year. The Tax Cuts and Jobs Act, signed into law in December 2017, substantially increased the standard deduction amounts and made significant changes to itemized deductions, generally starting in 2018. After 2025, these provisions revert to pre-2018 law. Page 2 of 4, see disclaimer on final page
- 3. Quiz: Can You Answer These Social Security Benefit Questions? Most people will receive Social Security benefits at some point in their lifetimes, but how much do you know about this important source of income? Take this quiz to learn more. Questions 1. Can you receive retirement and disability benefits from Social Security at the same time? a. Yes b. No 2. If your ex-spouse receives benefits based on your earnings record, your benefit will be reduced by how much? a. Reduced by 30% b. Reduced by 40% c. Reduced by 50% d. Your benefit will not be reduced 3. For each year you wait past your full retirement age to collect Social Security, how much will your retirement benefit increase? a. 6% b. 7% c. 8% 4. Monthly Social Security benefits are required to be paid by which of the following methods? a. Paper check only b. Paper check, direct deposit, or debit card c. Direct deposit or debit card 5. Are Social Security benefits subject to income tax withholding? a. Yes b. No 6. Once you've begun receiving Social Security retirement benefits, you can withdraw your claim if how much time has elapsed? a. Less than 12 months since you've been receiving benefits b. Less than 18 months since you've been receiving benefits c. Less than 24 months since you've been receiving benefits Answers 1. b. No. If you receive a disability benefit, it will automatically convert to a retirement benefit once you reach full retirement age. 2. d. Your benefit will not be reduced if your ex-spouse receives Social Security benefits based on your earnings record. 3. c. Starting at full retirement age, you will earn delayed retirement credits that will increase your benefit by 8% per year up to age 70. For example, if your full retirement age is 66, you can earn credits for a maximum of four years. At age 70, your benefit will then be 32% higher than it would have been at full retirement age. 4. c. Since 2013, the Treasury Department has required electronic payment of federal benefits, including Social Security. You can sign up for direct deposit of your benefits into your current bank account or open a low-cost Electronic Transfer Account (ETA) at a participating financial institution. Another option is to sign up for a Direct Express® prepaid debit card. Under this option, your Social Security benefits are deposited directly into your card account, and you can use the card to make purchases, pay expenses, or get cash. 5. b. No. Withholding isn't mandatory, but you may voluntarily ask the Social Security Administration to withhold federal income tax from your benefits when you apply, or later, if you determine you will owe taxes on your Social Security benefits (not everyone does). You may choose to have 7%, 10%, 15%, or 25% of your benefit payment withheld. Ask a tax professional for help with your situation. 6. a. If something unexpected happens and you've been receiving Social Security benefits for less than 12 months after signing up, you can change your mind and withdraw your claim (and reapply at a later date). You're limited to one withdrawal per lifetime, and there are also financial consequences. You must repay all benefits already paid to you or your family members based on your application (anyone affected must consent in writing to the withdrawal), and repay any money previously withheld, including Medicare premiums or income taxes. Did you know that 94% of all workers are covered under Social Security? Source: Social Security Fact Sheet on the Old-Age, Survivors and Disability Insurance Program, July 2017 Page 3 of 4, see disclaimer on final page
- 4. Cedar Point Financial Services LLC® Todd N. Robison, CLU President 10 Wright Street 2nd Floor Westport, CT 06880 203-222-4951 [email protected] www.cedarpointfinancial.com Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2018 Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Cedar Point Financial Services LLC is a member firm of PartnersFinancial. Kestra IS is not affiliated with Cedar Point Financial Services or PartnersFinancial. How has tax reform affected the generation-skipping transfer tax? The Tax Cuts and Jobs Act, signed into law in December 2017, doubled the federal generation-skipping transfer (GST) tax exemption to $11.18 million in 2018 (adjusted for inflation in later years). After 2025, the exemption is scheduled to revert to its pre-2018 level and be cut approximately in half. Otherwise, the federal GST tax remains the same. The federal GST tax generally applies if you transfer property to a skip person. A skip person is someone who is two or more generations younger than you (for example, a grandchild). The GST tax may apply in addition to any gift or estate tax. Similar to the gift tax provisions, annual exclusions (up to $15,000 per recipient in 2018) and exclusions for qualifying educational and medical expenses are available for GST tax. You can protect up to $11.18 million (in 2018) with the GST tax exemption. Transfers in excess of the GST tax exemption are generally taxed at 40%. A GST generally occurs on a transfer that is subject to federal gift or estate tax and made to a skip person, or a transfer to a trust if all the beneficiaries with an interest in the trust are skip persons. A GST may also occur on certain distributions from trusts to skip persons. Additionally, a GST may occur when an interest in a trust terminates, and skip persons then hold all interests in the trust. Unlike with the gift and estate tax applicable exclusion amount, the GST tax exemption is not portable between spouses. The estate of a deceased spouse cannot transfer any unused GST tax exemption to the surviving spouse. Note: An early version of the legislation proposed approximately doubling the gift and estate tax basic exclusion amount and the GST tax exemption for 2018 to 2024. After 2024, the estate tax and the GST tax would have been repealed. The gift tax would not have been repealed, although the top gift tax rate would have been reduced from 40% to 35% after 2024. However, the only provision that made it into the final legislation was the doubling of the gift and estate tax basic exclusion amount and the GST tax exemption for 2018 to 2025. What are the gift and estate tax rules after tax reform? The Tax Cuts and Jobs Act, signed into law in December 2017, approximately doubled the federal gift and estate tax basic exclusion amount to $11.18 million in 2018 (adjusted for inflation in later years). After 2025, the exclusion is scheduled to revert to its pre-2018 level and be cut approximately in half. Otherwise, federal gift and estate taxes remain the same. Gift tax. Gifts you make during your lifetime may be subject to federal gift tax. Not all gifts are subject to the tax, however. You can make annual tax-free gifts of up to $15,000 per recipient. Married couples can effectively make annual tax-free gifts of up to $30,000 per recipient. You can also make unlimited tax-free gifts for qualifying expenses paid directly to educational or medical service providers. And you can make deductible transfers to your spouse and to charity. There is a basic exclusion amount that protects a total of up to $11.18 million (in 2018) from gift tax and estate tax. Transfers in excess of the basic exclusion amount are generally taxed at 40%. Estate tax. Property you own at death is subject to federal estate tax. As with the gift tax, you can make deductible transfers to your spouse and to charity; there is a basic exclusion amount that protects up to $11.18 million (in 2018) from tax, and a tax rate of 40% generally applies to transfers in excess of the basic exclusion amount. Portability. The estate of a deceased spouse can elect to transfer any unused applicable exclusion amount to his or her surviving spouse (a concept referred to as portability). The surviving spouse can use the unused exclusion of the deceased spouse, along with the surviving spouse's own basic exclusion amount, for federal gift and estate tax purposes. For example, if a spouse died in 2011 and the estate elected to transfer $5 million of the unused exclusion to the surviving spouse, the surviving spouse effectively has an applicable exclusion amount of $16.18 million ($5 million plus $11.18 million) to shelter transfers from federal gift or estate tax in 2018. Page 4 of 4