The Tax Cuts and Jobs Act (TCJA) was signed into law at the end of 2017. These new laws and regulations could have a major impact on your individual and business tax planning. Below are some questions and answers that may be applicable to your tax situation. This is the right time to take advantage of last-minute tax planning opportunities that could potentially reduce your tax liability for 2018 and future years.
Will I still be able to claim a personal exemptions for myself and my dependents?
For 2018 through 2025, personal exemptions have been suspended. This will substantially increase taxable income for large families. However, increases in the standard deduction and the child credit, in conjunction with lower tax rates, could mitigate this increase.
The child credit has been doubled to $2,000 per child under age 17. In addition, the credit will be available to more families than in the past. The credit will not begin to phase out until adjusted gross income exceeds $400,000 for joint filers ($200,000 for all other filers), compared with the 2017 phase-out thresholds of $110,000 and $75,000, respectively. The TCJA also includes a $500 credit for qualifying dependents other than qualifying children.
Will I be better off itemizing or taking the standard deduction?
The TCJA nearly doubled the standard deduction for 2018 ($12,000 for single and separate, $18,000 for heads of household, and $24,000 for joint filers). This increased deduction may be more beneficial than itemizing, especially with the changes made to itemized deductions. As in the past, taxpayers on the borderline between itemizing and taking the standard deduction should consult with their tax preparer for tax planning strategies.
How will my itemized deductions change?
The deduction for state and local income taxes, real estate taxes, and personal property taxes (or sales tax if greater) is now capped at $10,000 per year ($5,000 for separate).
The home mortgage interest deduction will be limited to interest expense incurred on a maximum ceiling of $750,000 of home mortgage acquisition debt, unless the debt was incurred prior to 12/15/17, where the limitation remains at $1 million. The reduced ceiling is in effect from 1/1/18 through 12/31/25.
In addition, the home equity loan interest deduction was repealed through 12/31/25. Home equity debt that qualifies as acquisition debt (secured by the principal residence and used to buy, build, or significantly improve your main or second home) and is less than the $750,000 limit previously noted would still be deductible.
Miscellaneous deductions have been eliminated, which means that unreimbursed business expenses will be gone. Out-of-pocket employee expenses are no longer deductible. If the amount of these expenses is substantial, you might consider negotiating a wage increase or expense reimbursement by your employer.
Is alimony still deductible under the new tax law?
If you are already divorced or your divorce is finalized in 2018, you will still be able to deduct your alimony payments. However, the new law eliminates the deductibility of alimony for divorces executed after 12/31/18. You will not lose your tax deduction if you need to modify an existing divorce decree. The original orders will still be governed by the laws in effect at the time those orders were entered. However, a couple will have the option of going by the new law when modifying their pre-2019 divorce in the future.
Are there any new benefits for pass-through business owners?
Self- employed individuals and owners of pass-through entities that meet certain requirements may be able to deduct as much as 20% of the net income that comes directly from the business (known as ‘qualified business income’) on their individual income tax returns. Taxable income must be under $157,500(or $315,000 if married, filing jointly) in order to receive the full deduction. There are additional qualifications and limits when income levels exceed these thresholds.
Am I still required to have health insurance for myself and members of my family?
The TCJA repealed the individual shared responsibility payment (penalty imposed on individuals who do not have health insurance). However, other aspects of the Affordable Care Act are still in place.
Did the tax reform act have any effect on business deductions?
Some business write-offs have been eliminated or made more complicated this tax season.
The deduction for business interest expense now has limits based on sum of business interest income, plus 30% of adjusted taxable income
Net operating losses can now offset only 80% of taxable income, rather than 100%, and no longer includes income in carryback years.
Entertainment expenses (i.e. taking your client to theater or sporting events) and various fringe benefits (i.e. your employees’ Commuting Fringe Benefits and Moving Expenses) are no longer deductible. Meals are still 50% deductible if associated with the operation of a trade or business.
The Domestic Production Activity Deduction (DPAD) was repealed for tax years beginning after 12/31/17.
The corporate alternative minimum tax (AMT) has been eliminated under the new tax law. This tax was designed to ensure that companies with large taxable incomes would pay at least a small amount of tax. In addition, unused minimum tax credits can be refunded if certain criteria are met.
Businesses can claim a larger 100% first-year depreciation deduction on qualified property (new or used). The new law increased the maximum deduction form $500,000 to $1 million, and it also increased the phase-out threshold from $2 million to $2.5 million.
Get the Answers Now
The Tax Cuts and Jobs Act may have resulted in more questions than answers. Tax professionals are still waiting for Congress and the IRS to clarify many of the new provisions. Unfortunately, this is not simplification at all, and many tax professionals will find it necessary to increase their fees because of additional education requirements, staffing and the complexity of the requirement reporting. Please contact our office, and we will be happy to assist you.