2018 Tax Changes
Analysis provided by Thomson Reuters Tax & Accounting News
Alimony Deduction by Payor/Inclusion by Payee Suspended
Under pre-Act law, alimony and separate maintenance payments were deductible by the payor spouse under Code Sec. 215(a) and includible in income by the recipient spouse under Code Sec. 71(a) and Code Sec. 61(a)(8). New law. For any divorce or separation agreement executed after Dec. 31, 2018, or executed before that date but modified after it (if the modification expressly provides that the new amendments apply), alimony and separate maintenance payments are not deductible by the payor spouse and are not included in the income of the payee spouse. Rather, income used for alimony is taxed at the rates applicable to the payor spouse. (Former Code Secs. 215, 61(a)(8), and 71, as stricken by Act Sec. 11051)
TEBCPA Summary: Under the old tax law the recipient included the amount received in their income and the payer deducted the amount paid from their income. Under the new law alimony is no longer deductible for the payer. In essence alimony will be treated the same as child support, it won’t be deductible.
Standard Deduction Increased
Taxpayers are allowed to reduce their adjusted gross income (AGI) by the standard deduction or the sum of itemized deductions to determine their taxable income. Under pre-Act law, for 2018, the standard deduction amounts, indexed to inflation, were to be: $6,500 for single individuals and married individuals filing separately; $9,550 for heads of household, and $13,000 for married individuals filing jointly (including surviving spouses). Additional standard deductions may be claimed by taxpayers who are elderly or blind.New law. For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the standard deduction is increased to $24,000 for married individuals filing a joint return, $18,000 for head-of-household filers, and $12,000 for all other taxpayers, adjusted for inflation in tax years beginning after 2018. No changes are made to the current-law additional standard deduction for the elderly and blind. (Code Sec. 63(c)(7), as added by Act Sec. 11021(a))
TEBCPA Summary: See personal exemptions summary in next topic.
Personal Exemptions Suspended
Under pre-Act law, taxpayers determined their taxable income by subtracting from their adjusted gross income any personal exemption deductions. Personal exemptions generally were allowed for the taxpayer, the taxpayer’s spouse, and any dependents. The amount deductible for each personal exemption was scheduled to be $4,150 for 2018, subject to a phaseout for higher earners.
New law. For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the deduction for personal exemptions is effectively suspended by reducing the exemption amount to zero. (Code Sec. 151(d), as modified by Act Sec. 11041(a)) A number of corresponding changes are made throughout the Code where specific provisions contain references to the personal exemption amount in Code Sec. 151(d), and in each of these instances, the dollar amount to be used is $4,150, as adjusted by inflation.
TEBCPA Summary: The “suspension” of the personal exemption along with the increase in the standard deduction adds an interesting dynamic for the taxpayer. The single taxpayer, who previously did not itemize, with no dependents would see a benefit because the new standard deduction for single taxpayers ($12,000) is greater than the old standard deduction ($6,550) and exemption ($4,150). So that taxpayer benefits. However, a family with one dependent would not benefit because the old standard deduction plus the 3 exemptions, father, mother & child ($13,000 + $4,150 +$4,150 + $4150 = $25,450) is greater than the new standard deduction for married filing jointly, $24,000. The discrepancy increases if that same family had additional dependents. The increase of the standard deduction and suspension of the exemption could have a minimal to no impact to those taxpayers who itemize. Each of those situations would have to be evaluated individually.
Miscellaneous Itemized Deductions Suspended
Under pre-Act law, taxpayers were allowed to deduct certain miscellaneous itemized deductions to the extent they exceeded, in the aggregate, 2% of the taxpayer’s adjusted gross income.
New law. For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the deduction for miscellaneous itemized deductions that are subject to the 2% floor is suspended. (Code Sec. 67(g), as added by Act Sec. 11045)
TEBCPA Summary: Under the new law miscellaneous itemized deductions are no longer deductible, whether they are more than the 2% adjusted gross income floor or not. The most common miscellaneous deductions were unreimbursed employer expenses, tax preparation fees, casualty losses, etc. Most taxpayers did not have enough expenses to meet the 2% floor so it won’t effect many taxpayers.
State and Local Tax Deduction Limited
Under pre-Act law, taxpayers could deduct from their taxable income as an itemized deduction several types of taxes paid at the state and local level, including real and personal property taxes, income taxes, and/or sales taxes. New law. For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, subject to the exception described below, State, local, and foreign property taxes, and State and local sales taxes, are deductible only when paid or accrued in carrying on a trade or business or an activity
described in Code Sec. 212 (generally, for the production of income). State and local income, war profits, and excess profits are not allowable as a deduction. However, a taxpayer may claim an itemized deduction of up to $10,000 ($5,000 for a married taxpayer filing a separate return) for the aggregate of (i) State and local property taxes not paid or accrued in carrying on a trade or business or activity described in Code Sec. 212; and (ii) State
and local income, war profits, and excess profits taxes (or sales taxes in lieu of income, etc. taxes) paid or accrued in the tax year. Foreign real property taxes may not be deducted. (Code Sec. 164(b)(6), as amended by Act Sec. 11042)
TEBCPA Summary: Before the new law state income taxes and local property taxes were fully deductible. However under the new law state income taxes and local property are combined into a “bucket” and the total is limited to $10,000. This will mainly effect taxpayers with a higher income and property with a higher value. For example, taxpayers with income less than $100K and homes with a value of less than $250K probably won’t be effected but those higher than those thresholds more than likely will be effected. Also the amount that is in excess of $10K that is disallowed can’t be carried forward to the subsequent years.
Deduction for Personal Casualty & Theft Losses Suspended
Under pre-Act law, individual taxpayers were generally allowed to claim an itemized deduction for uncompensated personal casualty losses, including those arising from fire, storm, shipwreck, or other casualty, or from theft. New law. For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the personal casualty and theft loss deduction is suspended, except for personal casualty losses incurred in a Federally-declared disaster. (Code Sec. 165(h)(5), as amended by Act Sec. 11044) However, where a taxpayer has personal casualty gains, the loss suspension doesn’t apply to the extent that such loss doesn’t exceed gain.
TEBCPA Summary: In essence, casualty losses are no longer deductible unless they result from a natural disaster that is recognized by the federal government.
Capital Gains Provisions Conformed
The adjusted net capital gain of a noncorporate taxpayer (e.g., an individual) is taxed at maximum rates of 0%, 15%, or 20%. Under pre-Act law, the 0% capital gain rate applied to adjusted net capital gain that otherwise would be taxed at a regular tax rate below the 25% rate (i.e., at the 10% or 15% ordinary income tax rates); the 15% capital gain rate applied to adjusted net capital gain in excess of the amount taxed at the 0% rate, that otherwise would be taxed at a regular tax rate below the 39.6% (i.e., at the 25%, 28%, 33% or 35% ordinary income tax rates); and the 20% capital gain rate applied to adjusted net capital gain that exceeded the amounts taxed at the 0% and 15% rates.
New law. The Act generally retains present-law maximum rates on net capital gains and qualified dividends. It retains the breakpoints that exist under pre-Act law, but indexes them for inflation using C-CPI-U in tax years after Dec. 31, 2017. (Code Sec. 1(j)(5)(A), as amended by Act Sec. 11001(a)) For 2018, the 15% breakpoint is: $77,200 for joint returns and surviving spouses (half this amount for married taxpayers filing separately), $51,700 for heads of household, $2,600 for trusts and estates, and $38,600 for other unmarried individuals. The 20% breakpoint is $479,000 for joint returns and surviving spouses (half this amount for married taxpayers filing separately), $452,400 for heads of household, $12,700 for estates and trusts, and $425,800 for other unmarried individuals. (Code Sec. 1(h)(1), as amended by Act Sec. 11001(a)(5))
TEBCPA Summary: No major changes other than the provisions were adjusted for inflation.
Exclusion for Moving Expense Reimbursements Suspended
Under pre-Act law, an employee could, under Code Sec. 3401(a)(15), Code Sec. 3121(a)(11), and Code Sec. 3306(b)(9), exclude qualified moving expense reimbursements from his or her gross income and from his or her wages for employment tax purposes. These were any amount received (directly or indirectly) from an employer as payment for (or reimbursement of) expenses which would be deductible as moving expenses under Code Sec. 217 if directly paid or incurred by the employee.
New law. For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the exclusion for qualified moving expense reimbursements is suspended, except for members of the Armed Forces on active duty (and their spouses and dependents) who move pursuant to a military order and incident to a permanent change of station. (Code Sec. 132(g), as amended by Act Sec. 11048)
TEBCPA Summary: This usually effected taxpayers who moved to a different city because the new work location had to have been more than 50 miles from the old work location, generally speaking (there were other criteria also.) Under the new law the moving expense deduction will be “suspended” unless you are in the military.
Child Tax Credit Increased
Under pre-Act law, a taxpayer could claim a child tax credit of up to $1,000 per qualifying child under the age of 17. The aggregate amount of the credit that could be claimed phased out by $50 for each $1,000 of AGI over $75,000 for single filers, $110,000 for married filers, and $55,000 for married individuals filing separately. To the extent that the credit exceeds a taxpayer’s liability, a taxpayer is eligible for a refundable credit (i.e., the additional child tax credit) equal to 15% of earned income in excess of $3,000 (the “earned income threshold”). A taxpayer claiming the credit had to include a valid Taxpayer Identification Number (TIN) for each qualifying child on their return. In most cases, the TIN is the child’s Social Security Number (SSN), although Individual Taxpayer Identification Numbers (ITINs) were also accepted.
New law. For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the child tax credit is increased to $2,000, and other changes are made to phase-outs and refundability during this same period, as outlined below. (Code Sec. 24(h)(2), as added by Act Sec. 11022(a)) Phase-out. The income levels at which the credit phases out are increased to $400,000 for married taxpayers filing jointly ($200,000 for all other taxpayers) (not indexed for inflation). (Code Sec. 24(h)(3), as added by Act Sec. 11022(a))
Non-child dependents. In addition, a $500 nonrefundable credit is provided for certain non-child dependents. (Code Sec. 24(h)(4), as added by Act Sec. 11022(a)) Refundability. The amount of the credit that is refundable is increased to $1,400 per qualifying child, and this amount is indexed for inflation, up to the base $2,000 base credit amount. The earned income threshold for the refundable portion of the credit is decreased from $3,000 to $2,500. ((Code Sec. 24(h)(6), as added by Act Sec. 11022(a)))
TEBCPA Summary: This will have a positive impact with most taxpayers with child dependents. For many middle-class tax payers this credit did not help because in many cases the credit was phased out due to their income level. Under the old law the phase out began at $110,000 for those who were married filing jointly. Under the new law the phase out begins at $400,000 for those who file married filing jointly. Because of the credit doubling to $2,000 and the higher income limit I expect many middle class taxpayers who previously were phased out to now be able to utilize the credit. As a whole this credit is a benefit to the taxpayer both working class and middle-class.
Short-Term Reduction to Medical Expense Deduction Threshold
A deduction is allowed for the expenses paid during the tax year for the medical care of the taxpayer, the taxpayer’s spouse, and the taxpayer’s dependents to the extent the expenses exceed a threshold amount. To be deductible, the expenses may not be reimbursed by insurance or otherwise. If the medical expenses are reimbursed, then they must be reduced by the reimbursement before the threshold is applied. Under pre-Act law, the threshold was generally 10% of AGI.
New law. For tax years beginning after Dec. 31, 2016 and ending before Jan. 1, 2019, the threshhold on medical expense deductions is reduced to 7.5% for all taxpayers. (Code Sec. 213(f), as amended by Act Sec. 11027(a)) In addition, the rule limiting the medical expense deduction for AMT purposes to 10% of AGI doesn’t apply to tax years beginning after Dec. 31, 2016 and ending before Jan. 1, 2019. (Code Sec. 56(b)(1)(B), as amended by Act Sec. 11027(b))
TEBCPA Summary: The threshold for medical expense deductions decreased from 10% of your adjusted gross income to 7.5% of adjusted gross income under the new law. This will primarily effect those who have major medical expenses because most taxpayers can’t meet the threshold. So unless the taxpayer has had an extended hospital stay or chronic illness with costly procedures, most taxpayers won’t be effected.
Repeal of Obamacare Individual Mandate
Under pre-Act law, the Affordable Care Act (also called the ACA or Obamacare) required that individuals who were not covered by a health plan that provided at least minimum essential coverage were required to pay a “shared responsibility payment” (also referred to as a penalty) with their federal tax return. Unless an exception applied, the tax was imposed for any month that an individual did not have minimum essential coverage.
New law. For months beginning after Dec. 31, 2018, the amount of the individual shared responsibility payment is reduced to zero. (Code Sec. 5000A(c), as amended by Act Sec. 11081) This repeal is permanent. The Act leaves intact the 3.8% net investment income tax and the 0.9% additional Medicare tax, both enacted by Obamacare.
TEBCPA Summary: When Obamacare was instituted those taxpayers who were not covered by an employer’s insurance plan and failed to purchase health insurance plan were subject to a tax penalty if they didn’t purchase insurance. Under the new law those taxpayers who fail to purchase insurance won’t be subject to a tax penalty.
The information provided was obtained from Thomson Reuters Tax & Accounting News. At the end of each topic I provide a brief summary. Please feel free to give me a call if you may have questions regarding your specific situation.
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