Be Tax Ready – understanding tax reform changes affecting individuals and families

The Tax Cuts and Jobs Act (TCJA), enacted in late 2017, produced the most sweeping tax law change in more than 30 years. The TCJA, often referred to as tax reform, affects nearly every taxpayer.

* Deduction for personal exemptions suspended

* Standard deduction nearly doubled

* Itemized deductions modified or discontinued

*** Deduction for state and local income, sales and property taxes modified. A taxpayer’s deduction for state and local income, sales and property taxes is limited to a combined, total deduction of $10,000 ($5,000 if married filing separately). Anything above this amount is not deductible.

*** Deduction for home equity interest modified. 

*** Deduction for casualty and theft losses modified. A taxpayer’s net personal casualty and theft losses must now be attributable to a federally declared disaster to be deductible.

*** Miscellaneous itemized deductions suspended. Previously, when a taxpayer itemized, they could deduct the amount of their miscellaneous itemized deductions that exceeded 2 percent of their adjusted gross income. These expenses are no longer deductible. This includes unreimbursed employee expenses such as uniforms, union dues and the deduction for business-related meals, entertainment and travel. It also includes deductions for tax preparation fees and investment expenses.

Benefits for dependents expanded or changed

Child tax credit and additional child tax credit. More families with children under 17 now qualify for a larger child tax credit. For 2018, the maximum credit increased to $2,000 per qualifying child. Up to $1,400 of the credit can be refundable for each qualifying child as the additional child tax credit. In addition, the income threshold at which the child tax credit begins to phase out is increased to $200,000 ($400,000 if married filing jointly).

Beginning with tax year 2018, a child must have a Social Security number issued by the Social Security Administration before the due date of the tax return (including extensions) to be claimed as a qualifying child for the child tax credit or additional child tax credit. Children with an ITIN can’t be claimed for either credit.

Credit for other dependents. A new credit of up to $500 is available for qualifying dependents other than children who can be claimed for the child tax credit. This means that a taxpayer may be able to claim this credit for children age 17 or over, including college students, children with ITINs, or other older relatives in the household. The qualifying dependent must be a U.S. citizen, U.S. national, or U.S. resident alien. The credit is calculated with the child tax credit in the form instructions. The total of both credits is subject to a single phase-out when adjusted gross income exceeds $200,000 ($400,000 if married filing jointly).

Deduction and exclusion for moving expenses suspended

The deduction for moving expenses is suspended. 

Alternative minimum tax (AMT) exemption amount increased

The AMT exemption amount is increased to $70,300 ($109,400 if married filing jointly or qualifying widow(er); $54,700 if married filing separately). The income level at which the AMT exemption begins to phase out has increased to $500,000 ($1 million if married filing jointly). 

Reporting 2018 health care coverage

Taxpayers must continue to report coverage, qualify for an exemption, or report an individual shared responsibility payment for tax year 2018. Most taxpayers have qualifying health coverage or a coverage exemption for all 12 months in the year and will check the box on the front of their tax return.

Retirement plans

* Recharacterization of a Roth conversion.

* Plan loans to an employee that leaves employment.

* Disaster relief.

529 plans and ABLE accounts

*ABLE accounts and rollovers from a 529 plan

*529 plans and K-12 education. 

Changes affecting small business taxpayers

Qualified business income deduction

Many owners of sole proprietorships, partnerships, trusts and S corporations may deduct 20 percent of their qualified business income. The new deduction -- referred to as the Section 199A deduction or the qualified business income deduction -- is available for tax years beginning after Dec. 31, 2017.

Changes to depreciation and expensing for businesses

The Tax Cuts and Jobs Act changed some laws regarding depreciation and expensing that can affect a business’s tax situation. Businesses can immediately expense more under the new law. There is a temporary 100 percent expensing for certain business assets.

Christine Lo

Accounting and Tax Services

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