Many of us have heard and read commentary about the TCJA. This is understandable. This was the most significant overhaul of the tax code since the 1981 Economic Recovery Tax Act. Much of the talk is smoke and mirrors with the goal of advancing one political position or another.
Once the smoke clears and after finishing the 2018 tax season, one is faced with a rather obvious question: How do we plan for the future? What has changed? In short, a lot. Currently, most of the personal changes are scheduled to “sunset” December 31, 2025 unless Congress changes the law.
The tax rates have changed for most taxpayers and generally down, but not every taxpayer will pay at a lower rate. There are some hidden tax increases because of the restructuring of brackets. These involve capital gains and corporations especially. I mention corporations because there are many more very small (1 or 2 member) corporations than huge ones.
The standard deduction nearly doubled for most filing statuses. Before popping the champagne cork, we also lost the personal exemption for individuals and their families. A family of four filing married filing jointly (MFJ), who take the standard deduction may just break-even or even loose.
There are other areas that need to be considered as they relate to TCJA. One of these is divorce. Alimony’s treatment is much different. In any divorce after 2018 where alimony has been awarded, will no longer be reportable or deductible. Paying alimony just got more expensive for the payor and cheaper for the recipient.
While we can’t claim dependent children as exemptions, the child tax credit increases to $2,000, $1,400 of which is refundable. There is also another dependent credit. It is only $500, but that helps. For those families who have children who have unearned income such as from stocks or bonds, this will no longer be taxed at the parent’s rate, but at the rates for estates. The parents can opt to have the income taxed at their rate. Each situation is unique so contact your tax professional.
Paying for education is a bit in flux because of sunset provisions on deductions such as the deduction for tuition and fees that expired in 2016, but still hasn’t been repealed. Congress could easily extend this benefit. There were several proposals to eliminate some of the education deductions that didn’t make the final bill, so they bear watching.
Thinking of changing jobs? If you do, the expenses we used to deduct are no longer available. The moving expense for a job-related move has also been dropped except for military moves (under orders). This includes employer reimbursement. Such reimbursement would now be income!
Many of us have heard the screams by high tax states like NY about the $10,000 cap on state and local income taxes. We may chuckle at their dilemma, but not so fast. Right here in GA, where the highest tax bracket is 6%, I have done returns where the client, owed more than $10,000 in state income tax and that was before property taxes. Those buying houses may have to change how they compute the cost of home ownership. As a side note, there is no state income tax in Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming at this writing.
Investment decisions must factor in tax consequences. The rates have stayed largely the same, but the brackets have changed. If those investments are in retirement accounts taxpayers have lost the flexibility of recharacterizing Roth IRA conversions. These can no longer be reversed.
Those who have taken a loan from 40(k) accounts and then left the company have new relief in the form of contributions to the plan of the new employer. This must be done before the next tax return is due.
Most taxpayers will take the standard deduction. For those that itemize, there are a lot of changes to the Schedule A. For those with large medical bills for themselves or elderly parents, the floor is now 10% of AGI. It was 7.5% but increased this year. The miscellaneous deductions subject to the 2% floor is gone. This includes expenses incurred as an employee and not reimbursed.
Claiming a loss deduction is gone except for nationally declared disasters. In the case of such hardships, the 10% early distribution penalty for tax-advantaged retirement plans will not apply. Also, the casualty loss deduction can be claimed in addition to the standard deduction amount with a $500 reduction in the loss.
Clearly, there are a lot of significant changes, both good and bad. The forms are different and more complex. This wasn’t a simplification of the code, but more of a rebalancing. For most W-2 only, taxpayers, the returns will be simple.
For taxpayers with real estate holdings, investments or businesses, it is more important now than ever to find a tax professional that understands the type of tax situation involved. Ask questions and be part of the team. It is your money both in the form of taxes and the fees you pay your provider.