The Tax Cuts and Jobs Act (TCJA) will impact individuals and businesses in many ways, and it is important to be aware of the impact for the 2018 tax year and beyond, and to plan accordingly.
For most individuals, the most significant change is the increase in the standard deduction, which on the surface seems like a major benefit. However, although the standard deduction has been almost doubled, personal exemption deductions have been eliminated. So, for example, under the old law, a married couple’s standard deduction would have been $13,000, and their two personal exemptions would have been $8,300 (2 x $4150), for a total deduction of $21,300. Under the new law, they will be able to deduct $24,000, the new standard deduction for 2018. So, the total increase in their deduction will only be $2,700. If they have two children, their deductions for 2018 under the old law would have been $29,600 ($13,000 plus 4 x $4,150), as compared to the new law’s $24,000, a reduction of $5,600. However, for individuals with children under age 17, the child tax credit for 2018 was increased to $2,000 (with $1,400 being refundable) from the prior $1,000, in many cases making up for the loss in the exemption deduction.
The TCJA also placed some limitations on itemized deductions by limiting the amount that can be claimed for state and local taxes, as well as totally eliminating the deduction for employee business expenses along with some other commonly used deductions. The only remaining allowable itemized deduction categories are medical expenses in excess of 7.5% of AGI, up to $10,000 of state and local taxes, home acquisition debt interest, investment interest, charitable contributions and gambling losses (limited to the amount of gambling income).
For taxpayers in business, the TCJA allows 100% expensing of purchased tangible business assets other than structures. At the same time, it also offers a new 20% flow-through business deduction. The combination of these two deductions must be carefully considered because expensing rather than depreciating the cost of equipment, machinery, etc., will reduce the business’s profit, which will in turn reduce the flow-through deduction. On the other hand, the new 20% deduction is limited for certain higher-income individuals, and reducing income by expensing capital purchases may actually help one to qualify for the deduction.
Married couples contemplating divorce will have to understand how the TCJA will affect their situation and whether they should finalize the divorce before the end of the year. Currently, alimony is deductible by the payer and taxable to the recipient. The TCJA has changed that long-standing rule for divorce agreements entered into after December 31, 2018, or pre-existing agreements that are modified after that date, to include a new provision stating that alimony is no longer deductible by the payer and is not income to the recipient.
Some additional issues of importance are as follows:
- Business entertainment expenses are no longer deductible.
- Up to $10,000 of Qualified Tuition Plan (Sec. 529) funds can be used for elementary and high school expenses, if permitted by the plan.
- Taxpayers who convert their traditional IRA to a Roth IRA can no longer change their minds and undo the conversion.
- Casualty losses, other than those incurred in a federally declared disaster area, are no longer deductible.
- Moving expenses are no longer tax deductible, and employer reimbursement for moving costs is now taxable income..
- For homes purchased after 2017, the home mortgage interest deduction is limited to the interest paid on the first $750,000 (married) or $375,000 (single) of home acquisition debt.
- Home equity debt interest is no longer deductible, even if the debt was acquired before 2018 and is $100,000 or less.
It is important to note that for taxpayers residing in a state that has a state income tax, some or all of the federal tax reform changes referred to above may not apply for state filing purposes, or they may apply only if the state legislature enacts conforming legislation.
These are just some of the major changes arising from the TCJA. Please contact us with comments or questions.