Additional Updates Regarding the 2017 Tax Cuts and Jobs Act
As you know in December 2017 Congress passed the “2017 Tax Cuts and Jobs Act”. That act was a major change to the tax regulations at that time. In February 2018 I sent out a post with some preliminary information. As I learned additional information regarding the law I wanted to update you with information. The information provided is not all-encompassing and the law may affect similar households in different manners. So be sure to let me know if you have questions regarding your specific questions. The information provided is for individuals and businesses.
Individual Income Tax Rates Modified (2018-2015)
-2017 & after 2025 – the seven individual income tax brackets are 10, 15, 25, 28, 33, 35, &
-2018-2025 - the seven individual income tax brackets are 10, 12, 22, 24, 32, 35, & 37%
Personal Exemption Suspended (2018-2025)
Personal Exemption Background (2017)
-There is a personal exemption for each taxpayer, spouse and their dependents
-For each exemption the taxpayer is allowed an additional deduction of $4,050
-The exemption is phased-out for higher income taxpayers (single taxpayer between
$261,500 to $384,000 and MFJ between $313,800 to $436,300)
Exemption Suspended from 2018 to 2025
-The personal exemption deduction is suspended for tax years 2018–2025 (i.e., amount is
TEBCPA: This change should be taken reviewed in tandem with the increase in the standard deduction, discussed immediately following, and the child tax credit, discussed below, to determine how it may effect the taxpayer(s).
Temporary Increase in Standard Deduction
-The basic standard deduction will be temporarily increase (from 2018-2025) for individuals across all filing statuses:
-These amounts will be indexed for inflation using the C-CPI-U for taxable years beginning
-The additional standard seduction for those age 65 or older or blind was not changed
TEBCPA: This change should be taken reviewed in tandem with the suspension of the personal exemption, discussed above, and the child tax credit, discussed below, to determine how it may affect the taxpayer(s).
Child Tax Credit Enhanced & New Family Credit (§24)
-There is generally a non-refundable child tax credit of $1,000 for each qualifying child
-The credit begins phasing out for higher income taxpayers (i.e., starting with AGI’s greater than $110,000 for MFJ and $75,000 for single taxpayers)
-The credit that may be refundable for lower income taxpayers (i.e., additional child tax
credit) to the extent the child credit exceeds the taxpayer's tax liability equal to the greater of:
*15% of earned income in excess of $3,000 or
*For families with 3 or more children to the extent the taxpayer's social security taxes
exceed the taxpayer's earned income credit
Special rules for taxable years 2018 through 2025 (§24(h))
-The child tax credit (CTC) is increased to $2,000 per qualifying child.
-The credit is further modified to temporarily provide for a $500 nonrefundable credit for qualifying dependents other than qualifying children.
-The maximum amount refundable may not exceed $1,400 per qualifying child (increased for inflation)
-The credit begins to phase out for taxpayers with AGI in excess of $400,000 (in the case of married taxpayers filing a joint return) and $200,000 (for all other taxpayers)
-The taxpayer is eligible for a refundable credit (the additional child tax credit) equal to 15% of earned income in excess of $2,500
-In order to receive the child tax credit (i.e., both the refundable and non-refundable
portion), a taxpayer must include a Social Security number for each qualifying child for
whom the credit is claimed on the tax return
TEBCPA: The suspension of the personal exemption, as discussed previously, the temporary increase in the standard deduction, discussed previously, and increase in the child tax credit should be viewed together to determine its impact on the taxpayer(s). Example 1: A taxpayer filing head of household with 2 dependents and not itemizing had a total amount for exemptions ($4,050 x 3 = $12,150), plus the standard deduction ($9,350) plus the child tax credit ($1,000 x 2 = $2,000) equaling a total deduction amount of $23,500. That same taxpayer will now have a total deduction amount of $22,000 ($18,000 Head of Household + $2,000 for each child as a child credit). This would subject an additional amount of $1,500 in income to be taxable. Resulting in a tax increase in comparison. Example 2: A taxpayer filing single or married filing separate with no dependent and not itemizing had a total amount for exemptions ($4,050) plus the standard deduction ($6,350) equaling a total deduction amount of $10,400. That same taxpayer will now have total deduction amount of $12,000. This would reduce their taxable income by $1,600, resulting in a tax saving in comparison. These changes ( personal exemption suspended, temporary increase in standard deduction, child tax credit enhanced) will effect each household differently based on the circumstances of that household.
Medical & Dental Expense Background
There shall be allowed as a deduction the expenses paid during the taxable year, not compensated for by insurance or otherwise, for medical care of the taxpayer, their spouse, or a dependent (as defined in §152, determined without regard to §152(b)(1) (i.e., no dependents of dependents), §152(b)(2) (i.e., married dependents), and §152(d)(1)(B) (i.e., gross income less than the exemption amount)), to the extent that such expenses exceed a 10% of adjusted gross income.
7.5% of AGI Limitation – AJCA (2017-2018)
-For 2017 & 2018 the threshold for deducting medical expenses is reduced to 7.5% for all
-This threshold applies for purposes of the AMT in addition to the regular tax
10% of AGI Limitation (after 2018)
-After 2018, medical and dental expenses are allowed to the extent they exceed 10% of AGI
TEBCPA: After 2018 medical expenses will be deductible on the portion that is in excess of 10% of your adjusted gross income (AGI). For 2017 & 2018 it was deductible for the portion in excess of 7.5% of your AGI. This usually doesn’t effect most taxpayers. But it can effect older payments who live in assisted living facilities (cost paid to an assisted living facility are deductible as a medical expense) and they pay for the facility themselves or the portion they pay themselves.
Deductible Taxes & Temporary $10,000 SALT Limitation
Deductible Taxes Background
-Taxpayers can deduct the greater of state and local 1) income taxes or 2) general sales taxes
-The state and local income taxes allowed generally include: 1) State and local, and foreign, real property taxes, 2) State and local personal property taxes and 3) State and local, and foreign, income, war profits, and excess profits taxes.
-In addition, there shall be allowed as a deduction State and local, and foreign, taxes not described in the preceding sentence which are paid or accrued within the taxable year in carrying on a trade or business (§162) or an activity described in §212 (relating to expenses for production of income).
Temporary Modifications (2018-2025)
-For tax years beginning after 2017 and before 2026, as a general matter, State, local, and foreign property taxes and State and local sales taxes are allowed as a deduction only when paid or accrued in carrying on a trade or business, or an activity described in §212 (relating to expenses for the production of income).
-Thus, the provision allows only those deductions for State, local, and foreign property taxes, and sales taxes, that are presently deductible in computing income on an individual’s Schedule C, Schedule E, or Schedule F on such individual’s tax return.
-The provision contains an exception to the above-stated rule. Under the provision a
taxpayer may claim an itemized deduction of up to $10,000 ($5,000 for married taxpayer filing a separate return) for the aggregate of 1) State and local property taxes not paid or accrued in carrying on a trade or business, or an activity described in §212, and 2)State and local income, war profits, and excess profits taxes (or sales taxes in lieu of income, etc. taxes) paid or accrued in the taxable year.
-Foreign real property taxes may not be deducted under this exception.
TEBCPA: Previously taxpayers would be able to itemize an unlimited (subject 50% of AGI limitation) amount of state income taxes and property taxes, (including ad valorem taxes on vehicles) paid during the year. Now that total amount will be limited to $10,000. This will effect many middle to upper middle class taxpayers starting roughing for those with $125K - $150 in adjusted gross income. Those in excess of $150K in adjusted gross income will almost surely be effected. This will limit the taxpayer(s) ability to reduce their taxable income. (Those with AGIs in excess of $150K obviously have a higher state income tax liability and they also normally purchase pricier homes resulting in more home mortgage interest, which could now be limited.)
Moving Expense Deduction & Exclusion Temporarily Suspended
Moving Expense Deduction Suspended for 2018 to 2025 (§217(k))
-The moving expense deduction is suspended (2018-2025) except for members of the Armed
-Forces (or their spouse or dependents) on active duty that move pursuant to a military
order and incident to a permanent change of station
-The exclusion from gross income and wages for qualified moving expense reimbursements is suspended (2018-2025) except in the case of a member of the Armed Forces of the United States on active duty who moves pursuant to a military order
TEBCPA: With the new tax law moving expenses are no longer deductible unless you are a member of the military on active duty.
Alimony Deduction Repealed for Divorces After 2018
-Alimony and separate maintenance payments are deductible by the payor spouse and
includible in income by the recipient spouse
Alimony Deduction & Income Inclusion Repealed
-Generally, for divorce or separation instruments executed after 2018, alimony and separate maintenance payments are not deductible by the payor spouse and not included in income by the recipient spouse
-For any divorce or separation instrument executed before 2019, and modified after that
date, if the modification expressly provides that the amendments made by this section apply to such modification: alimony and separate maintenance payments are not deductible by the payor spouse and not included in income of the payee spouse
TEBCPA: Beginning after 2018 alimony will no longer be deductible by the payor and no longer included in income by the payee. In essence it will basically be the same as child support, not deductible.
Qualified Business Income (QBI) 20% Deduction (2018-2025)
Qualified Business Income Deduction (New §199A)
-For taxable years beginning after December 31, 2017, and before January 1, 2026, an
individual taxpayer generally may deduct 20% of qualified business income (QBI) from a partnership, S corporation, or sole proprietorship, as well as 20% of aggregate qualified REIT dividends and qualified publicly traded partnership income
-The deduction is an amount equal to the lesser of:
1. the combined qualified business income amount of the taxpayer, or
2. an amount equal to 20% of the excess (if any) of:
a. the taxable income of the taxpayer for the taxable year, over
b. the net capital gain (as defined in §1(h)) of the taxpayer for such taxable year.
-The QBI deductible amount for each qualified trade or business is limited based on W-2
wages and capital investment phased-in above a threshold amount of taxable income (i.e., $157,500 and $315,000 for MFJ)
-A qualified trade or business means any trade or business other than a specified service trade or business and other than the trade or business of performing services as an employee
-The disallowance of the deduction on income of specified service trades or businesses also phases in above the threshold amount of taxable income (i.e., $157,500 and $315,000 for MFJ)
TEBCPA: This new provision basically means that business owners (partnerships, S corporations, sole proprietors) will be able to deduct 20% of their qualified business income. This is in addition to their normal business expenses.
Qualified Transportation Fringe
Qualified Transportation Fringes Defined (§132(f))
For purposes of this section, the term “qualified transportation fringe” means any of the following provided by an employer to an employee:
1. Transportation in a commuter highway vehicle if such transportation is in connection with
travel between the employee's residence and place of employment
2. Any transit pass
3. Qualified parking
4. Any qualified bicycle commuting reimbursement
NOTE – The amount eligible for an exclusion from gross income is limited and adjusted annually for inflation.
Disallowance of Qualified Transportation Fringes
The TCJA provision disallows a deduction for expenses associated with providing any qualified transportation fringe to employees of the taxpayer, and except as necessary for ensuring the safety of an employee, any expense incurred for providing transportation (or any payment or reimbursement) for commuting between the employee’s residence and place of employment.
TEBCPA: This new provision essentially states that employers can no longer deduct transportation assistance programs (MARTA cards, free parking, van pools, etc.) If these items are provided the employer either can’t deduct it as an expense or they must include it in the employee’s income on their W-2 and then deduct it as an expense.
Business Entertainment Expenses Disallowed After 2017
Meals & Entertainment Expenses After 2017
-No deduction is allowed (for amounts paid or incurred after December 31, 2017) with
*An activity generally considered to be entertainment, amusement or recreation.
*Membership dues with respect to any club organized for business, pleasure,
recreation or other social purposes, or a facility or portion thereof used in connection with any of the above items.
-Thus, the provision repeals the pre-2018 exception to the deduction disallowance for
entertainment, amusement, or recreation that is directly related to (or, in certain cases, associated with) the active conduct of the taxpayer’s trade or business (and the related rule applying a 50% limit to such deductions)
-Taxpayers may still generally deduct 50% of the food and beverage expenses associated
with operating their trade or business (e.g., meals consumed by employees on work travel)
TEBCPA: This provision disallows deductions that previously allowed for social clubs (Buckhead Club, Commerce Club) sporting and entertainment events. It also disallows the cost for meals with clients and/or potential clients because they are considered “entertainment”. Meal costs are still deductible at 50% for employees who are traveling for work purposes or for the security of the employees or convenience of the employer. Examples include meals delivered because employees are working late. Meal cost for holiday and summer office parties are deductible. Employers may attempt to still deduct meals with clients and/or potential clients by calling it a “business expense” that is “ordinary and necessary”. “The business expense deduction is available to any business taxpayer, regardless of whether it is doing business as a sole proprietor, partnership or corporation, as long as the payment qualifies as an ordinary and necessary business expense,” said the IRS.