How 2018 Tax Changes Impacted Securities Qualifications Exams

In December 2017, President Trump signed the new federal tax code into law with most of its provisions taking effect on January 1. Although the new code is complicated, our subject matter experts have reviewed those parts of the code that could likely impact qualification examinations.

We’ve detailed below some key elements of the new tax code that could affect the Series 6, Series 7, Series 52, Series 53, Series 24, Series 26, Series 10, Series 65 and Series 66.  Our staff senses that it is unlikely that tax-related questions will change abruptly. It is more likely that old questions will be removed from test question banks and new questions integrated over time, keeping true to best practices for quality assurance. (An excellent way to be ready for any changes is to consider a prep package for the exams that are affected).

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Here are some possible elements of the new tax code that we expect to appear on the various qualification examinations at some point this year or next.

Kiddie Tax
Earned income is still taxed the same...to the child. The change is to unearned income. Instead of being taxed at the parent’s top rate, everything above the $2,100 threshold is now taxed using the trust and estate’s table.

Section 529 Plans
For the first time, funds contributed to a Section 529 Plan will be permitted to be used for qualified expenses for K-12 education. Qualified expenses include tuition at an elementary or secondary public, private or religious school, for up to $10,000 per year.

Corporate Tax Rates
Instead of a graduated rate, there is a flat 21% tax applied to earnings of C corporations. The 70% dividends received exclusion now falls to 50%. This change applies if the ownership of the dividend-paying company is less than 20%.

Annual Gift Tax Exclusion
This exclusion increased from $14,000 to $15,000.

Other Changes for 2018

Even before the new tax bill was signed, there were some changes for 2018, mainly to retirement plan contributions. Here is a list of some of the items that have and haven’t changed:

Traditional and Roth IRAs
No changes made, either to the annual maximum contribution or the catch-up for those 50 and older.

Traditional and Roth IRA Phase-outs
The traditional IRA deductibility phase-out for those covered by employer-sponsored plans begins at $63,000 and ends at $73,000 for singles and $101,000 to $121,000 for married couples.

The Roth IRA eligibility phase-out begins at $120,000 and ends at $135,000 for singles, and $189,000 to $199,000 for married couples.

SEPs
Maximum contribution is $55,000.

S.I.M.P.L.E Plans
There are no changes.

401(k) and 403(b) Plans
Maximum elective deferrals increased to $18,500. Maximum with employer contribution rose to $55,000.

Keogh Plan
Maximum total contribution increase to $55,000.

Non-retirement Plan Changes Estate and Lifetime Gift Exclusion
This exclusion increased to $5.6 million per person with a married couple enjoying an exclusion of $11.2 million.

Top Tax Rates
The highest marginal tax rate reduced to 37% on a joint return, with taxable income exceeding $600,000 on a joint return and exceeding $500,000 on a single return.

Trust and Estate Taxation
The only change has been to the levels, and the concept remains the same—tax brackets are highly compressed. That is, once the trust’s (or estate’s) income exceeds $12,500, it is taxed at the new top rate of 37%.

Pass-through Entities
This change affects those entities issuing a Schedule K-1, including S corporations, LLCs, partnerships and, although not technically a pass-through, sole proprietorships. There is a 20% deduction against qualified business income (QBI) subject to earnings limits for “service” business, such as financial planners,  doctors, accountants, and lawyers (joint filers earning more than $315,000). The nature of the computation and various options is highly complicated.