TAX REFORM

TAX REFORM

TAX REFORM 2018



TAX REFORM 2018
-Changes to 2018 tax preparation with implementation of the Tax Cuts and Jobs Act (TCJA)-

  1. About the TCJA
  2. Tax Rate Changes
  3. Standard Deduction Amounts Increased
  4. Schedule A Itemized Deduction Changes
  5. Schedule A Example - Comparison from 2017 to 2018
  6. Deduction & Exclusion for Moving Expenses
  7. Personal Exemptions
  8. Child Tax Credit (CTC) & Additional Child Tax Credit
  9. Credit for Other Dependents
  10. Alternative Minimum Tax (AMT) Exemption
  11. Alimony Payments
  12. Student Loans
  13. Combat Zone Tax Benefits
  14. Health Care Coverage
  15. Retirement Plans
  16. ABLE Accounts
  17. 529 Plans Allow for K-12 Education
  18. Maximum Rates on Capital Gains & Qualified Dividends
  19. New Capital Gain Breakpoints for 2018
  20. Filing Status
  21. Am I Required to File a Tax Return?
  22. Schedule C Provisions
  23. Section 179 Expense Limits
  24. 100% Bonus Depreciation
  25. Sec. 199 - Qualified Business Income Deduction
  26. Taxable Income (TI)
  27. Software Changes
  28. Section 199A Calculation
  29. Kiddie Tax Modifications
  30. Helpful Links Regarding the TCJA


About the TCJA
"The Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018, Pub. L. 115-97, is a congressional revenue act originally introduced in Congress as the Tax Cuts and Jobs Act (TCJA), that amended the Internal Revenue Code of 1986."
 
Most sweeping tax reform in over 30 years that affects both individuals and businesses; estimated revision/creation of more than 400 taxpayer forms & instructions (more than double the amount in a typical year).
 
TCJA was signed into law by President Donald J. Trump on December 22, 2017.
 
Most changes did not apply until January 1, 2018 and remain in effect until December 31, 2025, pending further legislation.
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Tax Rate Changes
Individual Rates are lowered to 10%, 12%, 22%, 24%, 32%, 35% and 37%
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Standard Deduction Amounts Increased
Single $12,000 ... (up from $6,350 in 2017)
Married Filing Joint/Qualifying Widow(er) $24,000 ... (up from $12,700 in 2017)
Married Filing Separately $12,000 ... (up from $6,350 in 2017)
Head of Household $18,000 ... (up from $9,350 in 2017)
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Schedule A Itemized Deduction Changes
    Limit on overall itemized deductions for high-income AGI has been suspended
    Deduction for state & local income, sales & property taxes is limited to $10,000 (see below)
 
 
    Home Mortgage/HELOC Interest
  • Deduction for mortgage interest is limited to interest you paid on a loan secured by your main home or second home that you used to buy, build, or substantially improve your main or second home. (i.e. interest paid on home equity loans will NOT be deductible unless the proceeds were used to buy, build, or substantially improve your main or second home)
  • Pending further guidance from the IRS, the burden of proof will lay with the taxpayer on determining whether HELOC interest is deductible.
    New Dollar Limit on Total Qualified Residence Loan Balance
  • Beginning in 2018, taxpayers may only deduct interest on $750,000 of qualified residence loans. ($375,000 for married filing separate) The limits apply to the combined amount of loans used to buy, build or substantially improve the taxpayer's main home and second home.

**Mortgage Interest Example: In January 2018, a taxpayer takes out a $500,000 mortgage to purchase a main home with a fair market value of $800,000. In February 2018, the taxpayer takes out a $250,000 home equity loan to put an addition on the main home. Both loans are secured by the main home and the total does not exceed the cost of the home. Because the total amount of both loans does not exceed $750,000, all of the interest paid on the loans is deductible. However, if the taxpayer used the home equity loan proceeds for personal expenses, such as paying off student loans and credit cards, then the interest on the home equity loan would not be deductible.

    Charitable Contributions
  • Limit on cash charitable contributions has increased from 50% to 60% of AGI
  • No charitable deduction for amounts paid to an institution of higher education in exchange for the right to purchase tickets or seating at an athletic event
    Casualty & Theft Losses
  • Net personal casualty and theft losses are deductible only to the extent they're attributable to a federally declared disaster. Claims must include the FEMA code assigned to the disaster.
    Miscellaneous Deductions
  • Previous deduction for job-related expenses or other miscellaneous itemized expenses that exceeded 2% of AGI has been suspended. (i.e. unreimbursed job expenses like uniforms and union dues, tax prep fees, investment/management expenses, safe deposit fees and pass-through expenses are not deductible)
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Schedule A Example - Comparison from 2017 to 2018
2017 Schedule A - Taxpayer & Spouse (MFJ) were able to itemize their deductions of $48,955 which was higher than the standard deduction of $12,700 for the 2017 tax year.
 
2018 Schedule A - Assume that for tax year 2018, Taxpayer & Spouse have relatively the same deductions. However, the taxes paid are limited to $10,000, mortgage insurance premiums aren't deductible and the Job Expenses & Certain Miscellaneous Deductions has been eliminated completely from Schedule A. These changes result in a standard deduction of $24,000 for the taxpayers. This is a decrease of $24,955 in deductions for the taxpayers. This could dramatically affect their tax bill for 2018 and reinforce why tax planning is important.
 
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Deduction & Exclusion for Moving Expenses
    The deduction for moving expenses is suspended. No deduction is allowed for use of an automobile as part of a move.
    The suspension does NOT apply to members of the U.S. Armed Forces on active duty who move pursuant to a military order related to a permanent change of station.
    Employers will include moving expense reimbursement as taxable income in employees' wages.
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Personal Exemptions
    For 2018, the deduction for personal exemptions has been suspended. You cannot claim an exemption for you, your spouse, or your dependents.
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Child Tax Credit (CTC) & Additional Child Tax Credit
    The maximum credit increased to $2,000 per qualifying child ..... (up from $1,000 in 2017)
    $1,400 of the credit can be refundable for each qualifying child as the additional child tax credit (claimed on Form 8812; shown below)
    Income threshold at which the CTC phases out is increased to $400,000 for married filing jointly
    Qualifying children must have a Social Security Number issued by the Social Security Administration before the due date of your return to be eligible for the CTC or ACTC
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Credit for Other Dependents
    New nonrefundable credit of up to $500 for each qualifying dependent (other than children claimed for CTC)
    Qualifying dependent must be a U.S. citizen, U.S. national, or U.S. resident alien
    Credit is calculated with the child tax credit in the form instructions
    Total of both credits are subject to a single phase out when AGI exceeds $200,000 or $400,000 if married filing jointly
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Alternative Minimum Tax (AMT) Exemption
    The AMT exemption amount is increased to $70,300 ($109,400 MFJ)
    Income level at which AMT exemption begins to phase out has increased to $500,000 ($1,000,000 MFJ)
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Alimony Payments
    Alimony and separate maintenance payments are not deductible for any divorce or separation agreement executed after December 31, 2018
    Alimony or separate maintenance payments are not included in income for any divorce or separation agreement executed after December 31, 2018
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Student Loans
    Student loans that are discharged due to death or disability are not included in income beginning January 1, 2018
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Combat Zone Tax Benefits
    Members of the U.S. Army, U.S. Navy, U.S. Marines, U.S. Air Force, and U.S. Coast Guard who performed services in the Sinai Peninsula can claim combat zone tax benefits retroactive to June 2015; see Publication 3, Armed Forces Tax Guide
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Health Care Coverage
    For 2018, you must continue to report coverage, exemption status, or an individual shared responsibility payment
    The shared responsibility payment is reduced to zero under TCJA for tax year 2019 and all subsequent years
 
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Retirement Plans
    Recharacterization of a Roth Conversion
  • You can no longer recharacterize a conversion from a traditional IRA, SEP or SIMPLE to a Roth IRA
  • New law also prohibits recharacterizing amounts rolled over to a Roth IRA from other retirement plans, such as 401(k) or 403(b) plans
  • Under the TCJA, the rule that permits a contribution to one type of IRA to be recharacterized as a contribution to the other type of IRA does NOT apply to a conversion contribution to a Roth IRA; thus, recharacterization cannot be used to unwind a Roth conversion (recharacterization is still permitted with respect to other contributions)

Example - Taxpayer A converts his traditional IRA to a Roth IRA in January 2018. All contributions that were previously deductible are included in Taxpayer A's income for 2018. After the conversion, the value of the assets in the Roth IRA decline; under prior rules, Taxpayer A was able to reverse the conversion (and effectively not include the converted balance in income) by recharacterizing the IRA as a traditional IRA. Then Taxpayer A could later convert his traditional IRA to a Roth IRA (reconversion), including only the lower value in income. New law closes this loophole.

    Plan Loans to an Employee that Leaves Employment
  • If the taxpayer terminates employment (or the plan is terminated) with an outstanding plan loan, the sponsor may offset the taxpayer's balance with the outstanding balance of the loan
  • The taxpayer has until the due date of the return to rollover the loan balance to an IRA or eligible retirement plan
    Disaster Relief
  • Laws enacted in 2017 and 2018 allow for plan participants to access their retirement plan funds to recover from disaster losses incurred in federally declared disaster areas in 2016, 2017 and 2018
  • The law may allow the affected taxpayers to:
    • Waive the 10% additional tax on early distributions
    • Include a qualified hurricane distribution in income over a 3-year period
    • Repay the distributions to the plan
    • Have expanded loan availability and/or extend the loan repayment period
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ABLE Accounts
    Rollover from a 529 Plan
  • Eligibility to rollover limited amounts from a 529 qualified tuition program account of the designated beneficiary to the ABLE account of the designated beneficiary to their family member
    Saver's Credit
  • Beginning in 2018, the Saver's Credit can be taken for contributions to an ABLE account if the taxpayer is the designated beneficiary
    Changes for Taxpayers with Disabilities
  • Enables eligible individuals with disabilities to put more money into their ABLE account, qualify for the Saver's Credit in many cases and roll money from their 529 plans into their ABLE accounts
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529 Plans Allow for K-12 Education
    The TCJA allows distributions from 529 plans to be used to pay up to $10,000 of tuition per beneficiary (regardless of the number of contributing plans) each year at an elementary or secondary (K-12) public, private or religious school of the beneficiaries choosing
 
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Maximum Rates on Capital Gains & Qualified Dividends
    The provision generally retains the present-law maximum rates on net capital gain and qualified dividends. The breakpoints are based on the same amounts as the breakpoints under present law, except the breakpoints are indexed using the C-CPI-U in taxable years beginning after December 31, 2017. (see table on next slide)
    Chained Consumer Price Index for All Urban Consumers (C-CPI-U)
    Unlike the CPI-U, the C-CPI-U accounts for the ability of individuals to alter their consumption patterns in response to relative price changes. The C-CPI-U accomplishes this by allowing for consumer substitution between item categories in the market basket of consumer goods and services that make up the index, while the CPI-U only allows for modest substitution within item categories.
    The provision requiring C-CPI-U indexing after 2017 is permanent
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New Capital Gain Breakpoints for 2018
Filing Status15-percent Breakpoint20-percent Breakpoint
Married Individuals Filing Joint Returns and Surviving Spouses$77,200$479,000
Married Individuals Filing Separate$38,600$239,500
Heads of Household$51,700$452,400
Single Individuals (other than Surviving Spouses and Heads of Households)$38,600$425,800
Estates and Trusts$2,600$12,700
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Filing Status
    In general, filing status depends on marital status. The IRS considers a person unmarried for the whole year if - on the last day of the tax year - he/she is unmarried or legally separated from a spouse under a divorce or separate maintenance decree.
    For federal tax purposes, taxpayers of the same sex are considered married if they were lawfully married in a state (or foreign country) whose laws authorize the marriage of two individuals of the same sex, even if the state (or foreign country) in which they now live does not recognize same-sex marriage.
    Head of Household (HOH)
  • To qualify, a person must be unmarried or "considered unmarried" on the last day of the year and pay more than half the cost of keeping up a home for a year
  • HOH must have a qualifying person (usually a qualifying child) that lived with them the entire year
  • Paid preparer due diligence requirement for HOH status (new in 2018)
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Am I Required to File a Tax Return?
IF your filing status is . . .AND at the end of 2018 you were* . . .THEN file a return if your gross income** was at least . . .
Singleunder 65
65 or older		$12,000
  13,600
Married filing jointly***under 65 (both spouses)
65 or older (one spouse)
65 or older (both spouses)		$24,000
  25,300
  26,600
Married filing separatelyany age$5
Head of householdunder 65
65 or older		$18,000
  19,600
Qualifying widow(er)under 65
65 or older		$24,000
  25,300
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Schedule C Provisions
    Meals and entertainment expenses associated with the active conduct of the taxpayer's trade or business have been disallowed and/or limited for 2018
    Beginning January 1, 2018, there is NO allowable deduction for entertainment expenses
    Meals expense is deductible if:
  • The expense is an ordinary and necessary expense under Section 162(a)
  • It is not lavish or extravagant
  • The taxpayer, or an employee of the taxpayer, is present for the food/beverages
  • Food/beverages are provided to current or potential customers/contacts
  • The food is provided during an entertainment activity, the food/beverages are stated separately on the invoice
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Section 179 Expense Limits
    In 2018, the maximum deduction under Section 179 increases to $1 million
    The phaseout threshold amount increases to $2.5 million for qualifying property placed in service during the year
    Applies to BOTH new and used property
    Not allowed for property held for the production of income, such as rental property
    Expanded to include certain tangible personal property used predominantly to furnish lodging or in connection with furnishing lodging
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100% Bonus Depreciation
    Extended to December 31, 2023
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Sec. 199 - Qualified Business Income Deduction
    Tax Cuts and Jobs Act, Provision 11011 Section 199A - Qualified Business Income Deduction
    Eligible taxpayers may be entitled to a deduction of up to 20 percent of qualified business income (QBI)
    Eligible taxpayers may also be entitled to a deduction of up to 20 percent of their combined qualified real estate investment trust (REIT) dividends and qualified publicly traded partnership (PTP) income
    Qualified Business Income (QBI)
  • A qualified trade or business, other than a specified service trade or business and other than the trade or business of being an employee
    Specified Service Trade or Business (SSTB)
  • Any trade or business involving the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services (including investing and investment management, trading or dealing in securities, partnership interests, or commodities), and any trade or business where the principal asset of such trade or business in the reputation or skill of one or more of its employees or owners.
    Phase-in of SSTB limitation
  • The threshold amount is $157,500 ($315,000 for married filing joint)
    Limitation based on W2 wages and capital
  • Taxpayers with taxable income above the threshold amount have the limit based on either wage paid or wages paid plus a capital element
  • The limitation is the greater of (a)50% of the W2 wages paid or (b) the sum of 25% of the W2 wages paid plus 2.5% of the unadjusted basis, immediately after acquisition, of all qualified property
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Taxable Income (TI)
Type of Business(as per IRS definitions)TI Less Than $315,000 (MFJ) or $157,000 (AOF)TI Between: $315,000-$415,000 (MFJ) or $157,500-$207,500 (AOF)TI Greater than: $415,000 (MFJ) or $207,500 (AOF)
Specified Service Trade or Business (SSTB)199A Deduction allowed with no limitsMust complete Sch A; then 199A Deduct. is reduced by % of income that exceeds TI threshold &/ or W2 wages and qualified property$0 Deduction
Qualified Trade or Business (Non-service)199A Deduction allowed with no limits199A Deduction is reduced according to the % of income that exceeds the TI threshold amount199A Deduction calculated as the lesser of (1) 20% of TI or (2) the greater of (a) 50% of W2 wages or (b) 25% of W2 wages plus 2.5% of qualified property
TI - Taxable IncomeMFJ - Married filing JointlyAOF - All Other Filers
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Software Changes
    Qualified business income is still input as Schedule C, Schedule E, Schedule F or pass-through income from Schedule K-1's
    Under the 'Deductions and Credits' tab there is a new section labeled 'Qualified Business Income Deduction (Section 199A Deduction)'
 
 
    Each QBI activity must be added so the software prepares the calculation for 199A
 
 
    When you add the QBI activity, the software will show you the calculation; adjustments can be made on this screen
 
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Section 199A Calculation
    Depending on the AGI, the software will produce a Simplified Worksheet or a more detailed worksheet
    Both worksheets will show you the QBI Deduction the taxpayer qualifies for on the tax return
    No specific form associated with Section 199A; entered on line 9 of Form 1040
 
 
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Kiddie Tax Modifications
    TCJA simplifies the "kiddie tax" by applying ordinary and capital gains rates applicable to trusts and estates to the net unearned income of a child
    Effectively, the child's tax is unaffected by the tax situation of the child's parents or the unearned income of any siblings
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Helpful Links Regarding the TCJA
    https://www.irs.gov/pub/irs-pdf/p5307.pdf
    https://www.irs.gov/newsroom/tax-cuts-and-jobs-act-provision-11011-section-199a-qualified-business-income-deduction-faqs
    https://www.irs.gov/newsroom/tax-reform-resources
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