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TAX BULLETIN 2018-1: TAX REFORM SIGNED INTO LAW

a Roth conversion. From the current language of the effective date, it is unclear whether this would prevent a 2017 Roth conversion from being recharacterized in 2018.

• Taxation of alimony. Under 2017 law, alimony and separate maintenance payments were deductible by the payor and includible in income by the recipient. (Child support payments are not treated as alimony.) The House bill proposed to reverse this treatment, making alimony and separate maintenance payments non-deductible to the payor and non-taxable to the recipient. The Senate bill had no similar provision. The Act generally follows the House bill but delays the effective date by one year, generally being effective for any divorce or separation instrument executed after December 31, 2018.

• Sale of principal residence exclusion. Under 2017 law, up to $250,000 of gain ($500,000 if filing jointly) on the sale of a principal residence could be excluded from income. Among the requirements is that the principal residence be owned and used as your principal residence for two out of the last five years. You could use this rule only once every two years. This exemption was available regardless of income. Both the House and Senate Bills proposed that (i) the principal residence must be owned and used as your principal residence for five out of the last eight years and (ii) you can use this rule only once every five years. The House proposal also contained a limit to the exclusion if income exceeded a certain amount. In a surprise, none of these modifications were included in the Act. As a result, no changes were made to the principal residence exclusion rules.

• Identification of securities sold, exchanged and gifted. Gain or loss generally is recognized for Federal income tax purposes on the sale of property. A taxpayer’s gain or loss on a disposition of property is the difference between the amount realized on the sale and the taxpayer’s cost basis in the property. Under 2017 law, if a taxpayer has acquired stock in a corporation on different dates or at different prices and sells or transfers some of the shares of that stock, and the lot from which the stock is sold or transferred is not adequately identified, the shares sold are deemed to be from the earliest acquired shares (the “first-in-first-out” rule; FIFO). However, under 2017 law, if a taxpayer specifically identifies the shares of stock to be sold, the shares of stock treated as sold are the shares that have been identified. The same rules apply to charitable gifts and gifts to trusts or family members. Although the Senate bill had proposed eliminating the ability to specifically identify lots and mandating that the FIFO rule be used, the Act makes no changes; the 2017 rules will remain in place.

• Like-kind exchanges. Under 2017 law, real estate and personal property could qualify for a tax-deferred like-kind exchange. The property had to be held either for investment or for use in a trade or business. Under the Act, like-kind exchanges will be available only for real estate, not personal property. This will end, for example, like-kind exchanges of art. This new rule is effective for transfers after 2017. However, there is a transition rule to allow like-kind exchanges of personal property to be completed on a tax-free basis if you either disposed of the relinquished property or acquired the replacement property on or before December 31, 2017.

• 529 Savings Plans. Under 2017 law, funds in 529 Savings Plans could be withdrawn tax-free if used for higher education expenses. The Act expands the type of expense that can be paid via a 529 Savings Plan and allows up to $10,000 per year to be used for elementary and high school tuition and specifically allows funds to be used for private and religious schools. A provision that would have also

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