Tax Cuts and Jobs Act (2017), SECURE Act (2019), Taxpayer Certainty and Disaster Relief Act (2019)

Passed in December 2017, the Tax Cuts and Jobs Act (TCJA) was the first major tax reform passed since 1986. In December 2019, two additional laws  were passed which made some further changes and extended some expired provisions from earlier years.

Below are some of the most significant changes that may affect our clients. Note that many of these are set to expire after 2025, unless extended by additional legislation. What follows is by no means an exhaustive list. You can find lots more detail elsewhere on the internet.

Format

Your 2018 and later tax returns will look different from earlier years. The 2018 1040 is a two-sided half sheet of paper (“postcard”) with basic personal information on the front and income and tax totals on the back. Then there are six schedules that break down the various details that used to all be on the 1040. For 2019 and forward, the format is more similar to 2017 and previous years. The two-sided 1040 is no longer postcard-sized, and there are now only three accompanying schedules, as follows:

• Sch. 1: Additional Income and Adjustments to Income
• Sch. 2: Additional Taxes (including Alternative Minimum Tax, excess Advance Premium Tax Credit repayment, Self-Employment Tax, additional tax on IRAs)
• Sch. 3: Additional Credits and Payments (Foreign tax, child care, education, and energy credits; estimated payments, Premium Tax Credit, extension payments)

Tax Brackets

The new tax bracket rates range from 10% to 37%. There is a nice table of the income levels at which these apply here.

Personal Exemptions

The personal exemption amount is now $0. However, the rules for determining who qualifies as a dependent have not changed and are still used for other purposes, such as the Child Tax Credit.

Child Tax Credit

The tax credit for children under age 17 has doubled to $2,000 per child and is available for joint filers with income up to $400,000 and singles with income up to $200,000. It is refundable up to $1,400, meaning if you owe no tax, you can still get a $1,400 refund per eligible child. Older children and other dependents qualify for a credit of $500 each (nonrefundable).

Standard Deduction

The standard deduction is now roughly double what it was prior to the TCJA. New levels for 2020 are:

• Single: $12,400 (plus $1,650 if over age 65)
• Married filing jointly: $24,800 (plus $1,300 each if over age 65)
• Head of Household: $18,650 (plus $1,650 if over age 65)

Itemized Deductions

Given the new higher standard deduction amounts, fewer people will benefit from itemizing. For those who do, a variety of changes were made to itemized deductions.

• Medical expenses are deductible to the extent they exceed 7.5% of your income.
• SALT: State and Local Tax deduction is capped at $10,000.
• Home mortgage interest for mortgages incurred after December 14, 2017 is deductible for qualified mortgage debt up to $750,000. (Previously, the limit was $1,000,000.)
• Home Equity Loan interest is only deductible to the extent the loan is used to buy, build, or improve the home, and to the extent your total mortgage debt is below $750,000.
• Unreimbursed employee business expenses, including employee home office expenses, are generally no longer deductible.
• Other miscellaneous 2% deductions such as job search costs, union dues, investment advisory fees, and tax prep fees are no longer deductible.
• Casualty and theft losses are only deductible in federally declared disaster areas.

Moving expenses

Moving expenses are no longer deductible except for members of the military. This also means that moving expenses paid for by your employer need to be reported as part of your income.

529-Plans (College Savings Plans)

These college savings plans may now be used for K-12 tuition up to $10,000 per year. However, not every state’s plan is allowing this change. If you want to tap these funds for K-12 expenses, you will need to check with your plan. As of 2019, 529-plan funds may be used for up to $10,000 (lifetime limit) in student loan payments for the designated beneficiary or a sibling. Also, this is not new, but it is important to know that if you’re withdrawing from a 529-plan to pay tuition at any level, you need to match the year of the withdrawal with the year you pay the educational institution. If you make a withdrawal in December but don’t pay the tuition bill until January, or pay in December and then withdraw to reimburse yourself in January, you may have a problem. The withdrawals are only tax- and penalty-free to the extent you have sufficient qualified education expenses in the same tax year.

Kiddie tax

The TCJA (2017) set the tax on the investment income of minors to be calculated at trust and estate tax rates, rather than being based on the parents’ tax bracket. The 2019 legislation, however, repealed this change, returning the kiddie tax rates to the parents’ marginal rate, effective with tax year 2020. You have the option of electing to use the parents’ rate for 2018 (probably by amendment) and 2019.

Alimony

For divorce agreements finalized by the end of 2018, alimony is deductible by the payer and taxable to the recipient. For divorce agreements finalized in 2019 and beyond, this is no longer the case. However, the deduction/taxability remain for agreements finalized prior to 2019. If both parties choose, divorce agreements established under the old law can be renegotiated in 2019 and beyond.

Qualified Business Income (QBI) – Sec. 199A

This is a big new topic for small business owners, including sole proprietors, landlords, partnerships, S-Corps, and many others. The basic idea is that small businesses can deduct up to 20% of net income before calculating the individual’s taxable income. For a “Specified Service Trade or Business” (SSTB), the 2020 deduction phases out for incomes above $163,300 (single/head of household) and $326,600 (married filing jointly). SSTB’s include businesses such as consultants, actors, accountants, lawyers, and health services. There are a variety of rules for how to handle taxpayers with multiple businesses. There are also adjustments based on capital gain income, wage expense, and various other issues. The deduction applies to rental property owners in many cases, but not all.

Affordable Care Act

The penalty for not having health insurance is eliminated starting in 2019. (Health insurance was still required for 2018.)

Passports

The State Department may deny, revoke, or limit use of a passport if tax debt is greater than $53,000 (including interest and penalties). (This was not from the TCJA, but rather from the FAST Act, which was passed in 2015, but went into effect on this matter in January 2018.)

IRAs

Beginning in tax year 2020, there are changes to IRA contribution and distribution rules. Taxpayers may now continue contributing to IRAs after age 70.5. And Required Minimum Distributions (RMDs) are now first required for the year you turn 72, rather than 70.5. In addition, there are changes to the rules for inherited IRAs.

State Implications

A good number of states automatically incorporate any changes to federal tax law. In many cases, the TCJA would result in an unintended tax increase at the state level. Therefore, many states made changes to their own tax systems to incorporate—or not—the various federal changes. A few examples:

• California does not recognize the 20% QBI deduction.
• California does not allow the use of 529-plan funds for K-12 education expenses.
• Massachusetts does not recognize the 20% QBI deduction.
• Massachusetts lowered its individual tax rates.
• New York is still allowing the moving expense deduction.
• New York will allow you to itemize deductions even if you use the standard deduction on your federal return.
• Vermont allows a 5% credit for charitable contributions even if you don’t itemize.
• Etc.