WILMINGTON — As an IRS Enrolled Agent, CPA, Assistant Professor of Accounting at Wilmington College, and owner/operator of Apple Tax Services, I have been asked many questions about the Tax Cuts and Jobs Act (“the new tax law”). As with many laws there has been much information, and perhaps misinformation, reported about this new law. Many people have expressed concern that certain deductions were eliminated such as charitable contributions, home mortgage interest deductions, state and local taxes deduction, etc.
It’s true many of these provisions were “wishes” of the Trump Administration. However, as often is the case once negotiations have completed the final law is much different than what was first proposed. To be sure, I will say this is the most sweeping change since The Tax Reform Act of 1986 — even surpassing that of the Affordable Care of 2010 (“Obama Care”).
The new tax law was so controversial that even though it is referred to as “The Tax Cuts and Jobs Act” it couldn’t be passed in Congress under that name. The official name is “An Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018”.
Because this law is so extensive an adequate summary can’t be shared in one article, nor should it be as many provisions would only apply to a very small handful of readers of the Wilmington New Journal. I will attempt to share the highlights of key provisions of individuals and businesses I encounter at the college VITA (Volunteer Income Tax Assistance) program or in my own small practice.
Today’s article speaks about key provisions for individuals, with a second article relating to businesses coming later.
Tax rates: As under the prior law there are seven individual tax rates. However, the rates have generally decreased. The lowest rate is still 10 percent. The 15 percent has been replaced with 12 percent, 25 percent with 22 percent, 28 percent with 24 percent, 33 percent with 32 percent, 35 percent stays the same, and 39.6 percent with 37 percent.
However, it needs to be noted that the income brackets don’t necessarily correspond to the old rates. For example, although the 22 percent basically replaces the 25 percent rate, a Married Filing Joint taxpayer enters the 22 percent at taxable income of $77,401 whereas they entered the 25 percent rate at $75,901 under the old law.
As you can see in this case not only is the rate lower the taxpayer doesn’t enter that bracket until an income level of $1,500 higher. However, this isn’t always the case. Because the 35 percent bracket is still intact, a good example would be a Married Filing Joint couple in that bracket. Under the new law, a taxpayer enters that bracket at $400,001 where they wouldn’t enter it until $416,701 under the prior law.
Adjustments: These are items, “deductions” if you will, a taxpayer could take on the “front page” of the 1040A and 1040 without itemizing. They were called “above the line deductions” because they occurred prior to the Adjusted Gross Income (AGI) figure.
The Moving Expense Deduction has been eliminated effective for tax year 2018. The Alimony Expense Deduction has been eliminated effective for tax year 2019. This applies for new divorce agreements effective Jan. 1, 2019, or those renegotiated after that date.
It should be noted a few provisions, such as this one, don’t take effect until 2019. When a taxpayer paying alimony takes this deduction, the receiver would need to claim as income. Once this new law is effective the receiving ex-spouse will not need to claim this income.
Deductions: One of the more largely reported items of the new law is regarding “deductions” a taxpayer can take. Although the original goal was to eliminate these deductions they are mainly intact. The question becomes: Is it worth to keep track of these items with a nearly doubling of the standard deduction? The “Standard Deduction” for Single and Married Filing Separate taxpayers has increased to $12,000 from $6,350; Married Filing Joint and Qualifying Widows/Widowers $24,000 from $12,700; and Head of Household $18,000 from $9,350.
Furthermore, the extra deduction for age 65 or blind has increased to $1,300 from $1,250 for Married Filing Joint, Qualifying Widow/Widower, or Married Filing Separate. The amount increased to $1,600 from $1,550 for Single and Head of Household.
Highlights of Itemized Deduction Changes
Itemized Phase-outs: The limit to itemize based on AGI has been repealed for tax years 2018-2025.
Medical Expense: The formula to determine the medical expenses to claim has been rolled back for all taxpayers from the 10 percent rate to the traditional (pre-Obama Care) rate of 7.5 percent for all taxpayers for tax years 2017 and 2018. This applies to regular tax calculations as well as those hit with the “Alternative Minimum Tax” (AMT). However, the 10 percent rate applies beginning in 2019 once again.
State and Local Taxes: State and local taxes, which are not part of a trade or business, are limited to $10,000 for all filers except for Married Filing Separate for which the $5,000 limit applies.
Home Mortgage Interest Deduction: The limit on the size of a loan for which home mortgage interest will be allowed has been reduced to $750,000 ($375,000 for Married Filing Separate Filers) from $1 million ($500,000 for Married Filing Separate Filers) on acquisition debt for a home.
Charitable Contributions: The prior limit of 50 percent of AGI donated to public and charitable organizations has been increased to 60 percent. Also, no charitable donation is allowed for a payment to a higher education institution in exchange for rights to purchase tickets or seating at athletic events.
Furthermore, a taxpayer must receive a written acknowledgment from the receiving organization for any contributions of $250 or more. The prior “exception to the contemporaneous written acknowledgement” had been repealed.
Casualty Losses: Personal casualty losses are only allowed if attributed to a federally declared disaster area.
Miscellaneous Itemized Deductions Subject to 2 percent AGI Limitation: This could be a big one for certain taxpayers. Items in this area, including work expenses, has been repealed.
Personal and Dependent Exemptions and Tax Credits
While the Standard Deduction has nearly doubled the Personal and Dependent Exemptions, the amount you subtract from your income before the tax is calculated for each person on the return, has been eliminated. This will reduce or eliminate any benefit of the increased standard deduction depending on the size of your household.
However, the Child Tax Credit has been doubled from $1,000 to $2,000. This can make a huge difference to many taxpayers because a credit usually has more of an effect on the tax liability than a deduction because credits are applied after the calculation of the tax. Credits are basically “coupons” for taxes.
The Child Tax Credit still only applies to children who would be a “dependent” under the old law for ages of 16 and younger. For children 17 or older a taxpayer can now receive the new “Family Credit” of $500 for each “dependent”. This new family credit applies to anyone in the household who would be a “dependent” under the old rules. I see this helping many taxpayers taking care of other family members such as elderly parents!
Other Individual Provisions
Health Insurance Penalty: The penalty for not having health insurance under ACA (Obama Care) has been repealed effective for 2019. A lot has been reported on this provision. As you can see, it does not apply until 2019. Thus, for one more year the penalty will apply.
Estate and Gift Tax Provision: The exemption before the Estate and Gift Taxes apply has been doubled to $10 million.
Tax Rates for Estates and Trusts: Just as with individuals the brackets have been changed. The new brackets are 10 percent, 24 percent, 35 percent, and 37 percent from 15 percent, 25 percent, 28 percent, 33 percent, and 39.6 percent.
Section 529 Plans and ABLE Accounts: Up to $10,000 of distributions can be distributed per student to pay expenses for a public, private, or religious elementary or secondary school. In other words, up to $10,000 a year can be allowed in K-12 education — not just college. Also, funds from an ABLE account, which in and of itself is rather new, can now be rolled over tax-free to a 529 plan. ABLE accounts are tax-favored savings plans for disabled individuals.
AMT (Alternative Minimum Tax): The exemption for AMT calculations has increased to $70,300 from $54,300 for Single and Head of Household filers, $109,400 from $84,500 for Married Filing Joint and Qualifying Widow/Widowers, and $54,700 from $42,250 for Married Filing Separate.
In closing on the personal side of taxes, there is to be a new “simplified” 1040 tax form that will replace the 1040EZ and 1040A. However, this new simplified form may require an additional six worksheets. Considering most taxes are prepared on a computer these days, the “simplification” of forms is irrelevant.
It should be noted that many, if not all these provisions expire in future years, which is not the case with most of the business tax changes. Most of the cited individual provisions mentioned above expire in 2025.