Passed in December 2017, the Tax Cuts and Jobs Act (TCJA) was the first major tax reform passed since 1986. 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.
Your tax return will look different. The 1040 is now 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. The schedules are as follows:
- Sch. 1: Additional Income and Adjustments to Income
- Sch. 2: Tax (Alternative Minimum Tax, Premium Tax Credit repayment)
- Sch. 3: Nonrefundable credits (Foreign tax, child care, education, and energy credits)
- Sch. 4: Other taxes (Self-employment, taxable IRA distributions, Affordable Care Act)
- Sch. 5: Other Payments and Refundable Credits (estimated payments, Premium Tax Credit)
- Sch. 6: Foreign Address and Third Party Designee
The new tax bracket rates range from 10% to 37%. There is a nice table of the income levels at which these apply here.
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).
The standard deduction is now roughly double what it was previously. New levels are:
- Single: $12,000 (plus $1,600 if over age 65)
- Married filing jointly: $24,000 (plus $1,300 each if over age 65)
- Head of Household: $18,000 (plus $1,600 if over age 65)
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 for 2018. For 2019-2025, the threshold is 10%.
- 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 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. 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.
Tax on the investment income of minors is now calculated at trust and estate tax rates, rather than being based on the parents’ tax bracket.
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 deduction phases out for incomes above $157,500 (single/head of household) and $315,000 (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 some 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.)
The State Department may deny, revoke, or limit use of a passport if tax debt is greater than $50,000 (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.)
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 are making changes to their own tax systems to incorporate—or not—the various federal changes. A few examples:
- California is not recognizing the 20% QBI deduction.
- California will not allow the use of 529-plan funds for K-12 education expenses.
- Massachusetts is not recognizing the 20% QBI deduction.
- Massachusetts is lowering 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 will allow a 5% credit for charitable contributions even if you don’t itemize.