Tax reform and 2019 returns

Published
  • May 01 2018, 1:01pm EDT
While the majority of taxpayers’ returns from the tax season just completed were not affected by the Tax Cuts and Jobs Act, the impact of its provisions will be felt for years to come – and right now is a good time to start getting ready.

With that in mind, the editors of Accounting Today have compiled a selection of parts of the act that will have the biggest effect on individual taxpayers next tax season, with major contributions from David De Jong, CPA, Esq., a partner at Stein Sperling Bennett De Jong Driscoll PC.

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While the majority of taxpayers’ returns from the tax season just completed were not affected by the Tax Cuts and Jobs Act, the impact of its provisions will be felt for years to come – and right now is a good time to start getting ready.

With that in mind, the editors of Accounting Today have compiled a selection of those parts of the act that will have the biggest effect on individual taxpayers next tax season, with major contributions from David De Jong, CPA, Esq., a partner at Stein Sperling Bennett De Jong Driscoll PC.

Individual rates

This is obviously one of the biggest changes: Seven new rate brackets are created for 2018-2025, of 10 percent, 12 percent, 22 percent, 24 percent, 32 percent, 35 percent and 37 percent. In 2018, the 37 percent bracket starts at $600,000 of taxable income for married couples filing jointly, $500,000 for singles and $300,000 for married couples filing separately. While capital gain rates are unchanged, the thresholds of the 15 percent and 20 percent brackets have changed in tandem with the ordinary income rate brackets. Personal exemptions are discontinued for 2018-2025.

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Standard deduction

The standard deduction for 2018 is more or less doubled, to $24,000 for married filing jointly, $18,000 for head of household, and $12,000 for single filers, with indexing for 2019-2025 before the increase expires.

SALT

The deduction for personal taxes (property taxes, and state, local or foreign taxes) is capped at $10,000 for years 2018-2025. Some high-tax states are working to mitigate the impact of this.

Alimony

The treatment of alimony is changed to make it nondeductible to the payer and tax-free to the recipient. This is effective after 2018, but clients should know about it so they can do pre-divorce planning.

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Moving expenses

The moving expense deduction and exclusion for employer-paid moving expenses is ended for 2018-2025 -- except for active-duty military who move by order to a permanent change of station.

Individual AMT

The Alternative Minimum Tax exemption is raised for 2018-2025 to $109,400 for married couples filing jointly, $70,300 for singles, and $54,700 for married filing separately.

The phaseouts of the exemption begin at 25 percent of excess AMT income over $1 million for married filing jointly and surviving spouses and $500,000 for others. Exemptions and phaseout levels are increased for cost of living in 2019 and subsequent years.

Child Tax Credit

The Child Tax Credit is doubled to $2,000 for each qualifying child from 2018-2025. A $500 nonrefundable credit applies for qualifying dependents other than children who are U.S. citizens or residents. The child’s Social Security number must be issued by the due date of the return and provided on the return. The $500 nonrefundable credit applies in the case of a child where the Social Security number rules are not met.

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Kiddie Tax

Kiddie Tax rates on children are revised for 2018-2025 to disregard the income of parents and to apply trust and estate income tax rates to the unearned income of applicable children. Earned income will be taxed at the regular rates of the child.

Affordable Care Act

The individual mandate for health insurance coverage is repealed effective 2019. Other portions of the ACA are currently unaffected, including the obligations of larger employers as well as the additional Medicare Tax and the tax on net investment income.

Roth conversions

A reconversion from a Roth IRA to a traditional IRA is prohibited if previously moved from a traditional to a Roth, effective 2018. Initial conversions from traditional IRAs to Roth IRAs are unaffected by the change.

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Pass-through deduction

New Code Section 199A, in effect from 2018 to 2025, creates a deduction under which a non-C corporation business owner can deduct against taxable income, subject to a limitation and a phaseout, an amount equal to the lesser of 20 percent of “combined qualified business income” (determined by distributive shares excluding owner wages or guaranteed payments in the case of a flow-through entity) or 20 percent of tentative taxable income less net capital gain.

Itemized deduction phaseout

The income phaseout (“Pease” limitation) on total itemized deductions is ended from 2018-2025.

Medical expenses

The floor is lowered to 7-½ percent of adjusted gross income for all individuals to deduct medical expenses in 2017 and 2018. It will return to 10 percent in 2019.

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Charitable contributions

The maximum deduction is increased for cash donations to public charities to 60 percent of adjusted gross income, but deductions for donations coupled with preferred seating at college sports events are disallowed, effective 2018. Direct donor reporting as a possible alternative to the donor obtaining contemporaneous written acknowledgment is ended effective 2017.

Cost of living

Cost of living adjustments are reduced by converting indexing to a version of the Consumer Price Index that assumes that consumers look for substitute items, rather than absorbing rising prices.

Like-kind exchanges

Section 1031 exchanges other than for real property are eliminated. This eliminates the possibility of deferring gain on cryptocurrency through a like-kind exchange.

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Employee awards

Vacations, meals, lodging, tickets, and gift certificates are excluded from employee achievement and length-of-service awards, essentially limiting this tax-free benefit to tangible personal property or a limited array of tangible choices.

Student loans

Discharges of student loans, including private loans, are excluded from income where the discharge is on account of death or total and permanent disability for 2018-2025.

Mortgage interest deduction

The maximum interest deduction is reduced on up to two residences to the cost of acquisition financing including improvements on $750,000 ($375,000 for married filing separately) effective 2018 through 2025, except for binding contracts scheduled to close in 2017 that actually closed by March 31, 2018. The deduction for interest on home equity indebtedness is suspended.

And note: Just because a mortgage is called a home equity loan does not necessarily make the underlying interest nondeductible. If the loan were used to purchase or improve a residence, it appears to remain acquisition indebtedness under the new law subject to the $1 million limitation on pre-Dec. 16, 2017, debt or the $750,000 limitation thereafter.

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Theft and casualty losses

The deduction is eliminated for 2018-2025 except for those in presidentially declared disaster areas.

Miscellaneous itemized deductions

The deduction is eliminated for all miscellaneous itemized deductions subject to the 2 percent of AGI floor for 2018-2025. Among the many deductions that will be lost are currently deductible education expenses such as many MBA degrees.

Gambling losses

The expenses of gamblers are included as part of their losses for 2018-2025, for purposes of denying a deduction when losses exceed winnings.

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Self-created works

Self-created patents, inventions, models, designs, secret processes, copyrights, and literary, musical or artistic compositions are removed from the definition of capital assets.