Welcome to "Tax Cuts and Job Act Provision"
by Laurie Kerridge, January 22, 2018
While the name could be debated, the new tax reform has been born with the weird name of “Tax Cuts and Job Act Provision.”
Following is a detailed summary of the known impacts and changes. For a breakdown of the new tax rate schedules and a comparison to the 2017 rates, click here here.
The standard deduction is doubling for 2018. Single filers will deduct $12,000 from their adjusted gross income, head-of-household filers $18,000 and joint filers will automatically get $24,000 to knock off their taxable gross income. This means that many people may no longer be able to itemize their deductions, however they will instead get this higher standard deduction.
I can’t believe it. As long as I’ve been alive, we’ve had personal exemptions. But they’re gone, completely. 100% gone. Payroll departments are losing their $^#@ trying to translate the W-4 exemptions into the new tax law.
Child Tax Credit
Starting in 2018, the $1,000 tax credit for each child under age 17 will be doubled to $2000, with $1,400 of the credit refundable to lower income taxpayers. Additionally, the package significantly increases the income phase-out thresholds. The credit begins to phase out for couples with adjusted gross incomes over $400,000 (up from $110,000 in 2017) and $200,000 for all other filers (up from $75,000).
Lawmakers decided to reduce the amount of mortgage debt homeowners can deduct, from $1,000,000 to $750,000. The limit applies to mortgage debt incurred after December 15, 2017, to buy or improve a principal residence or second home. Older loans are still subject to the $1 million cap.
The law also bans the deduction of interest on home-equity loans. And this change applies to both old and new home-equity debt. Interest accrued on home-equity debt after December 31, 2017, is not deductible. Now is the time to refinance your first mortgage to pay off and close your HELOC (home equity line of credit). What a dramatic change this is.
A proposal to extend the time you must own and occupy a home to qualify for tax-free profit when you sell it was dropped from the final legislation. As in the past, the law allows you to exempt up to $250,000 of such profit, or $500,000 if you’re married, as long as you have owned and lived in the house for two of the five years before the sale. Technically, this means 24 months out of 60 months, and you must wait two tax filing years before using the exemption again.
Affordable Care Act Penalty
The new law does repeal the “individual mandate” – the requirement that demands that you have health insurance or pay a fine. But not until 2019. For 2017 and 2018, the mandate is still in place.
The deduction for what you pay in state and local income tax, sales tax and property tax has been severely limited. Again, this is a historical deduction we are witnessing the near disappearance of.
Starting in 2018, the new law sets a $10,000 limit on your combined total of state, local and property tax. This will impact many people.
If you were paying attention to the news over the month of November and December, people were racing in to prepay their property taxes for the first quarter of 2018, however congress put a lid on that, informing people, after-the-fact, that unless they had already been billed and assessed, they could not write off a prepayment of 2018 property tax.
Specifically, if your property taxes were accruing throughout the 2017 year, and are due in 2018, you may still deduct them on your 2017 tax return if you paid that installment before December 31, 2017. Also, if you sold your home, or purchased a new home before 12/31/17, the escrow company would have withheld your prorate share, which can also be deducted. Be sure to bring final closing statement (HUD-1) to the tax accountant to take advantage of this amount.
Under the new rules, property and sales taxes will remain deductible for taxpayers in a business or for-profit activity. For example, if you own a residential rental property, you can continue to fully deduct property taxes paid on that property on Schedule E.
Unreimbursed Employed Expenses (Form 2106)
Gone. Pilots, flight attendants, truck drivers and railroad engineers, professional camera operators, certain media broadcasters, mechanics, construction workers and other blue collar employees who are expected to provide their own tools, equipment, travel expenses, meals while out of town, uniforms and cleaning… all used to get a massive deduction for per diem and travel expenses. Not anymore, unfortunately. Basically, the new law also repeals all miscellaneous itemized deductions subject to the 2% of AGI threshold, including the write-off for tax preparation fees, unreimbursed employee business expenses and investment fees. This is to the core, UNJUST!
Section 199A Qualified Business Income Deduction
The new law slashes the tax rate on regular corporations (sometimes referred to as “C corporations”) from 35% to 21%, starting in 2018. The law offers a different kind of relief to individuals who own pass-through entities — such as S corporations, partnerships and LLCs — which pass their income to their owners for tax purposes, as well as sole proprietors who report income on Schedule C of their tax returns. Starting in 2018, many of these taxpayers will be allowed to deduct 20% of their qualifying income before figuring their taxable income. For a sole proprietor in the 24% bracket, for example, excluding 20% of income from taxation would have the effect of lowering the tax rate to 19.2%.
The changes to the taxation of pass-through businesses are some of the most complex provisions in the new law, in part because of lots of limitations and anti-abuse rules. They’re designed to help prevent gaming of the tax system by taxpayers trying to have income taxed at the lower pass-through rate rather than the higher individual income tax rate. For many pass-through businesses, for example, the 20% deduction mentioned above phases out for taxpayers with incomes in excess of $157,500 on an individual return and $315,000 on a joint return. At the end of the day, most individuals who are self-employed or own interests in partnerships, LLCs or S corporations will be paying less tax on their pass-through income than in the past. Yay!!!
529 Plans to Pay for High School
The new law allows families to spend up to $10,000 a year from tax-advantaged 529 savings plans to cover the costs of K-12 expenses for a private or religious school. Previously, tax-free distributions from those plans were limited to college costs.
Despite efforts to eliminate the deduction for medical expenses, the new law is actually more generous than the old one. Under the old rules, medical expenses were deductible only to the extent they exceeded 10% of adjusted gross income. For 2017 and 2018, however, the threshold drops to 7.5% of AGI (which is where it’s been for centuries until 2016). Whoopee doo. Come 2019, the 10% threshold returns.
A big penalty is on the horizon for those charged with paying alimony. For separation agreements and divorce decrees executed after December 31, 2018, alimony will no longer be a tax deduction for the person paying and the spouse receiving will no longer have to report it as taxable income! This is going to make for some angry divorcees. Child support will continue to be non-deductible and non-taxable.
The new law will make it riskier to convert a traditional IRA to a Roth. Under the old law, you could reverse such a conversion — and eliminate the tax bill — by “recharacterizing” the conversion by October 15 of the following year. Starting in 2018, such do-overs are no longer do-overable. Conversions will be irreversible.
The new law retains the favorable tax treatment granted to long-term capital gains and qualified dividends, imposing rates of 0%, 15%, 20% or 23.8%, depending on your total income.
In the past, your capital gains rate depended on what tax bracket you fell in. But, with the changes in the brackets, Congress decided to set income thresholds instead. For example, the 0% rate for long-term gains and qualified dividends will apply for taxpayers with taxable income under about $38,600 on individual returns and about $77,200 on joint returns.
The new law eliminates a popular deduction. For people who incurred a job-related move to another city, no longer are the associated moving costs deductible. Going forward, only members of the military can claim a deduction of applicable costs over and above what wasn’t coverable by the government.
For a list of expiring tax provisions, see here.