By Sarah Brenner, JD
Today is April 15, 2019. This is deadline for filing your 2018 federal income tax return, unless you have an extension. This tax season was the first one where we saw the impact of the Tax Cuts and Jobs Act. Wholesale changes to the tax code made this a more interesting and unpredictable tax season than usual. Many taxpayers had lots of uncertainty about what tax reform would mean for their 2018 federal income tax returns. As we reach the tax-filing deadline, here are two IRA lessons we learned this tax season:
1. No prior year QCDs. A qualified charitable distribution (QCD) is a tax-free transfer from an IRA to charity. To do a QCD you must be age 70 ½ or older. QCDs became a lot more valuable in 2018 with more individuals choosing to take the much larger standard deduction on their tax returns instead of itemizing. Those who are no longer itemizing cannot make use of the charitable deduction. A QCD provides a way for those taxpayers to still get a tax break for their charitable donation. Unfortunately, many taxpayers discovered this too late. Many did not realize it until they sat down with their tax preparer in 2019. The result has been many taxpayers asking about prior year QCDs. Sadly, there is no such thing! A QCD can only be done for the current year. Hopefully, the word is out on this one and taxpayers will do a better job of integrating QCDs in a timely manner into their tax plan.
2. Recharacterization of Roth IRA Conversions is Really Gone. The Tax Cuts and Jobs Act eliminated recharacterization of conversions beginning with 2018 conversion. Unfortunately, not everyone got the memo that conversions are now irrevocable. We have gotten many questions about this. Many have described sad situations such as mistaken conversions, Roth IRAs that have lost significant value since conversion, and unexpected surges in income leading to a big tax bill. Others have asked if Congress has changed its mind or have searched fruitlessly for loopholes allowing a conversion to be undone. Some people unfortunately had to learn this lesson the hard way. Going forward, hopefully, the reality that there are no “do-overs” when it comes to conversion will be known to all and IRA owners will approach a Roth IRA conversion carefully. Now more than ever, good advice is essential when considering this strategy.