The Internal Revenue Service announced its cost-of-living adjustments (COLAs) which affect dollar limitations for pension plans and other items for the 2018 tax year.
Among the key changes for tax year 2018 is the increase of the contribution limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan. The limit has been raised from $18,000 to $18,500 for 2018.
All of the income ranges that determine eligibility for making deductible contributions were increased for 2018, as well. These allow for making contributions to traditional IRAs, to Roth IRAs, and to claim the saver’s credit.
Compensation and Limitation Increases Announced by the IRS for 2018
- The limitation on the exclusion for elective deferrals for 401(k) and 403(b) plans) increases from $18,000 to $18,500.
- The limitation for elective deferrals to deferred compensation plans of state and local governments and tax-exempt organizations, i.e. 457(b) plans, also increases from $18,000 to $18,500.
- The limit on annual additions to contribution plans defined under U.S. Code §415(c)(1)(A) increases from $54,000 to $55,000.
- The limit on the annual benefit under a defined benefit plan contained in §415(b)(1)(A) increases from $215,000 to $220,000.
- The annual compensation limit, as defined under IRCs §401(a)(17), §404(l), §408(k)(3)(C) and §408(k)(6)(D)(ii), increases to $275,000 from $270,000 in 2017.
- The compensation amount concerning the definition of “control employee” for fringe benefit valuation purposes, under federal regulation §1.61-21(f)(5)(i), increases from $105,000 in 2017 to $110,000. In addition, the compensation amount defined in IRC §1.61-21(f)(5)(iii) goes up to $220,000 from the current $215,000.
Unchanged Compensation and Limitation Amounts for 2018
The following compensations and limitation amounts have remained unchanged in the IRS Notice:
- The compensation amount regarding elective deferrals to SIMPLE retirement accounts is $12,500.
- The limitation concerning the definition of “key employee” in a top-heavy plan is $175,000.
- The limitation for catch-up contributions to 401(k), 403(b), and 457(b) plans for individuals age 50 or over is still $6,000, and the limitation under for catch-up contributions to an employer’s SIMPLE plan for individuals age 50 or over remains $3,000.
- The limitation used in the definition of “highly compensated employee” is $120,000.
- The compensation amount under regarding simplified employee pensions (SEPs) remains $600.
Some IRS Changes to Deductions and Exemptions for 2018
Along with retirement contribution limits, the Internal Revenue Service has announced the following changes, as well:
Adoption Assistance Exclusion
The maximum amount that can be excluded from an employee’s gross income for qualified adoption expenses under an employer’s adoption assistance program was $13,570 in 2017. For 2018, this is increased to $13,840 . The maximum amount that can be excluded in connection with the adoption of a child with special needs has increased from $13,570 in 2017 to $13,840 for 2018.
For taxpayers with adjusted gross income of $207,580, the amount excludable from their gross income will begin to phase out. For taxpayers with an adjusted gross income of $247,580 the excludable amount is completely phased out.
Foreign Earned Income Exclusion
Under IRC §911(b)(2)(D)(i) the maximum foreign earned income exclusion amount is $104,100 for 2018, up from $102,100 in 2017. The maximum amount of the foreign housing cost exclusion is now increased to $14,574 from $14,294 in 2017.
Health Flexible Spending Arrangements
Voluntary employee salary reductions for contributions to health flexible spending arrangements, also known as Flexible Spending Accounts, have a dollar limitation under §125(i). This is now up to $2,650 for plan years beginning in 2018, up from $2,600 in 2017.
Medical Savings Accounts
An employee must be covered by a high deductible health plan in order to make contributions to a Medical Savings Account, or to have their employer make the contributions for them. For 2018, a high deductible health plan is a plan with an annual deductible increased to $2,300-$3,450 for individual coverage - up from $2,250-$3,350 - and $4,600-$6,850 for family coverage (up from $4,500-$6,750 in tax year 2017).
Maximum out-of-pocket expenses can be no more than $4,600 for individual coverage and $8,400 for family coverage. These are up consecutively from $4,500 and $8,250 in 2017.
Qualified Transportation Fringes
The amounts that may be excluded from gross income for employer-provided “qualified transportation fringe benefits” and for “transportation in a commuter highway vehicle and any transit pass” for 2018 are both $260 per month (up from $255 in 2017).
For 2018 the personal exemption amount has been increased to $4,150 from the $4,050 in tax year 2017.
The standard deduction amounts for 2018 have also increased. These include $13,000 for married couples filing jointly, or surviving spouses, which is up from the current amount of $12,700, an increase to $6,500 from $6,350 for single taxpayers and married taxpayers filing separately , and $9,550, up from $9,350 in 2017, for heads of household.
For Employees Covered by Employer Sponsored Retirement Plans
Along with the increase of the contribution limit for employees who do participate in a 401(k), 403(b), and most 457 plans, as well as the federal government’s Thrift Savings Plan, there have been changes made in the phase-out range for deductions.
If either an employee or the employee's spouse was covered during the tax year by a retirement plan at work, the deduction may be reduced, or phased out, until it is eliminated, depending on filing status and income.
Of course, if neither the employee or spouse is covered by a retirement plan at work, these phase-outs of the deduction do not apply.
Here are the new phase-out ranges for 2018:
- The phase-out range for single taxpayers covered by a workplace retirement plan is $63,000 to $73,000, up from $62,000 to $72,000 in 2017.
- For married couples filing jointly, and the spouse making the IRA contribution is an active participant in a workplace retirement plan, the phase-out range has been raised from $99,000 to $119,000 to $101,000 to $121,000.
- If an employee is an IRA contributor and is not an active participant, but is married to someone who is covered, then the deduction is phased out if their combined income is now between $189,000 and $199,000 for 2018. This is up from $186,000 and $196,000.
- The phase-out range is not subject to an annual COLA for a married individual filing a separate return who is an active participant. It will remain at $0 to $10,000.
- The adjusted gross income phase-out range for taxpayers making contributions to a Roth IRA is $189,000 to $199,000 for married couples filing jointly, which is increased from the $186,000 to $196,000 range. For those filing as single or head of household, the income phase-out range is increased from $118,000 to $133,000 up to $120,000 to $135,000.
- For a married individual filing a separate return, and who makes contributions to a Roth IRA, the phase-out range is not subject to an annual COLA, and remains unchanged at $0 to $10,000.
(For details on the IRS Notice 2017-64, 10-19-17 click here)
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