For the second year in a row, April 15 won’t be “Tax Day” due to the COVID-19 pandemic. The IRS has announced that the federal income tax filing deadline for individuals for the 2020 tax year will be extended. This article explains what the new deadline is and who is affected. Note: Not all deadlines are extended.
They say one person’s trash is another person’s treasure. This may hold true when it comes to collectibles — those various objets d’art for which many people will pay good money. But if you’re considering selling or donating some of your precious items, be sure to consider the tax impact on your 2017 return.
The IRS views most collectibles, other than those held for sale by dealers, as capital assets. As a result, any gain on the sale of a collectible that you’ve had for more than one year generally is treated as a long-term capital gain.
But while long-term capital gains on many types of assets are taxed at either 15% or 20% for the 2017 tax year, capital gains on collectibles are taxed at 28%. (As with other short-term capital gains, the tax rate when you sell a collectible that you’ve had for one year or less typically will be your ordinary-income tax rate.)
Determining the gain on a sale requires first determining your “basis” — generally, your cost to acquire the collectible. If you purchased it, your basis is the amount you paid for the item, including any brokers’ fees.
If you inherited the collectible, your basis is its fair market value at the time you inherited it. The fair market value can be determined in several ways, such as by an appraisal or through an analysis of the prices obtained in sales of similar items at about the same time.
If you want to donate a collectible, your tax deduction will likely depend both on its value and on the way in which the item will be used by the qualified charitable organization receiving it.
For you to deduct the fair market value of the collectible, the donation must meet what’s known as the “related use” test. That is, the charity’s use of the donated item must be related to its mission. This probably would be the case if, for instance, you donated a collection of political memorabilia to a history museum that then puts it on display.
Conversely, if you donated the collection to a hospital, and it sold the collection, the donation likely wouldn’t meet the related-use test. Instead, your deduction typically would be limited to your basis.
There are a number of other rules that may come into play when selling or donating collectibles. Our firm can help you handle the transaction properly on your 2017 return.
© 2018
The clock is ticking down to the tax filing deadline. The good news is that you still may be able to save on your impending 2017 tax bill by making contributions to certain retirement plans.
For example, if you qualify, you can make a deductible contribution to a traditional IRA right up until the April 17, 2018, filing date and still benefit from the resulting tax savings on your 2017 return. You also have until April 17 to make a contribution to a Roth IRA.
And if you happen to be a small business owner, you can set up and contribute to a Simplified Employee Pension (SEP) plan up until the due date for your company’s tax return, including extensions.
Let’s look at some specifics. For IRA and Roth IRA contributions, the maximum regular contribution is $5,500. Plus, if you were at least age 50 on December 31, 2017, you are eligible for an additional $1,000 “catch-up” contribution.
There are also age limits. You must have been under age 70½ on December 31, 2017, to contribute to a traditional IRA. Contributions to a Roth can be made regardless of age, if you meet the other requirements.
For a SEP, the maximum contribution is $54,000, and must be made by the April 17th date, or by the extended due date (up to Monday, October 15, 2018) if you file a valid extension. (There’s no SEP catch-up amount.)
If not covered by an employer’s retirement plan, your contributions to a traditional IRA are not affected by your modified adjusted gross income (MAGI). Otherwise, when you (or a spouse, if married) are active in an employer’s plan, available contributions begin to phase out within certain MAGI ranges.
For married couples filing jointly, the MAGI range is $99,000 to $119,000. For singles or heads of household, it’s $62,000 to $72,000. For those married but filing separately, the MAGI range is $0 to $10,000, if you lived with your spouse at any time during the year. A phaseout occurs between AGI of $186,000 and $196,000 if a spouse participates in an employer-sponsored plan.
Contributions to Roth IRAs phase out at mostly different ranges. For married couples filing jointly, the MAGI range is $186,000 to $196,000. For singles or heads of household, it’s $118,000 to $133,000. But for those married but filing separately, the phaseout range is the same: $0 to $10,000, if you lived with your spouse at any time during the year.
Saving for retirement is essential for financial security. What’s more, the federal government provides tax incentives for doing so. Best of all, as mentioned, you still have time to contribute to an IRA, Roth IRA or SEP plan for the 2017 tax year. Please contact our firm for further details and a personalized approach to determining how to best contribute to your retirement plan or plans.
© 2018
It’s not uncommon for adult children to help support their aging parents. If you’re in this position, you might qualify for an adult-dependent exemption to deduct up to $4,050 for each person claimed on your 2017 return.
For you to qualify for the adult-dependent exemption, in most cases your parent must have less gross income for the tax year than the exemption amount. (Exceptions may apply if your parent is permanently and totally disabled.) Social Security is generally excluded, but payments from dividends, interest and retirement plans are included.
In addition, you must have contributed more than 50% of your parent’s financial support. If you shared caregiving duties with one or more siblings and your combined support exceeded 50%, the exemption can be claimed even though no one individually provided more than 50%. However, only one of you can claim the exemption in this situation.
Although Social Security payments can usually be excluded from the adult dependent’s income, they can still affect your ability to qualify. Why? If your parent is using Social Security money to pay for medicine or other expenses, you may find that you aren’t meeting the 50% test.
Also, if your parent lives with you, the amount of support you claim under the 50% test can include the fair market rental value of part of your residence. If the parent lives elsewhere — in his or her own residence or in an assisted-living facility or nursing home — any amount of financial support you contribute to that housing expense counts toward the 50% test.
An adult-dependent exemption is just one tax break that you may be able to employ on your 2017 tax return to ease the burden of caring for an elderly parent. Contact us for more information on qualifying for this break or others.
© 2018
The alternative minimum tax (AMT) was enacted back in 1969 to ensure that high-income individuals don’t take advantage of multiple tax breaks and avoid paying federal tax. However, in recent years, the AMT has been imposed on many middle-income taxpayers. Unfortunately, the Tax Cuts and Jobs Act (TCJA) retains the individual AMT. But AMT exemptions and phaseout thresholds have been increased for 2018 through 2025.
How it works: The AMT calculation runs side-by-side with your regular income tax calculation. The starting point for the AMT is your taxable income calculated under the regular tax rules. Next, you add in “tax preference items” and make other adjustments that disallow some regular tax breaks or change the timing of when they’re taken into account. Then you subtract an AMT exemption amount that’s based on your tax return filing status. The result is your AMT income.
Finally, you apply the AMT tax rates of 26% and 28% to your AMT income and compare the result to your regular tax liability. In effect, you’re required to pay the higher of the two amounts.
Many people are unsure how the changes in the TCJA will affect their specific tax situations. Here are some examples to help you better understand the effects of how the AMT works under the new law. (For simplicity, we’ve assumed all of these imaginary taxpayers are empty nesters who don’t qualify for education-related tax credits or child tax credits.)
It’s scary to think that taxpayers with less than $100,000 of taxable income could be hit with the AMT, but that’s just what happened to the Adams family in 2017. Fortunately, the TCJA brings good news: The Adams won’t owe AMT (assuming the same facts) for 2018 under the new law. Here’s why.
In 2017, this married joint-filing couple exercised an “in-the-money” incentive stock option (ISO) granted by the husband’s employer. The difference between the exercise price of the ISO shares and the trading price on the exercise date (the bargain element) was $50,000. The bargain element doesn’t count as income under the regular tax rules, but it does count as income under the AMT rules.
The calculation of the couple’s 2017 regular tax and AMT liabilities are as follows:
| Salary |
$75,000 |
| Other ordinary income |
$2,000 |
| Adjusted gross income |
$77,000 |
| Standard deduction |
($12,700) |
| Personal exemptions |
($8,100) |
| Taxable income |
$56,200 |
| Regular tax liability |
$7,498 |
| Regular taxable income |
$56,200 |
| ISO bargain element |
$50,000 |
| Standard deduction |
$12,700 |
| Personal exemptions |
$8,100 |
| AMT income before exemption |
$127,000 |
| AMT exemption (no phase-out) |
($84,500) |
| AMT taxable income |
$42,500 |
| AMT liability |
$11,050 |
So, for 2017, the Adams family owes $11,050 for the AMT.
Important note: This calculation would have been more complicated if the couple itemized deductions. But, for simplicity, we’ve assumed that they took the standard deduction instead.
Now, let’s assume the same facts for 2018. The calculation of the couple’s 2018 regular tax and AMT amounts under the TCJA are as follows:
| Salary |
$75,000 |
| Other ordinary income |
$2,000 |
| Adjusted gross income |
$77,000 |
| Standard deduction |
($24,000) |
| Taxable income |
$53,000 |
| Regular tax liability |
$5,979 |
| Regular taxable income |
$53,000 |
| ISO bargain element |
$50,000 |
| Standard deduction |
$24,000 |
| AMT income before exemption |
$127,000 |
| AMT exemption (no phase-out) |
($109,400) |
| AMT taxable income |
$17,600 |
| AMT liability |
$4,576 |
Thanks to the TCJA, the Adams will not owe AMT in 2018. They’ll owe the regular tax amount of $5,979. So, the new law benefits this couple.
Like the Adams, the Bradys experience a bunch of good luck under the TCJA. That is, they’ll owe AMT under the old rules but not new rules. Here’s how their tax situation will improve from 2017 to 2018.
In 2017, this married joint-filing couple had itemized deductions totaling $50,000, including $25,000 for state and local taxes. The calculation of the couple’s 2017 regular tax and AMT liabilities are as follows:
| Salary |
$310,000 |
| Other ordinary income |
$2,000 |
| Adjusted gross income |
$312,000 |
| Itemized deductions |
($50,000) |
| Personal exemptions |
($8,100) |
| Taxable income |
$253,900 |
| Regular tax liability |
$59,004 |
| Regular taxable income |
$253,900 |
| Itemized deduction for state and local taxes |
$25,000 |
| Personal exemptions |
$8,100 |
| AMT income before exemption |
$287,000 |
| AMT exemption (after partial phase-out) |
($52,975) |
| AMT taxable income |
$234,025 |
| AMT liability |
$61,771 |
For 2017, the Bradys owe the AMT amount of $61,771.
Now assume the same facts for 2018. The calculation of the couple’s 2018 regular tax and AMT amounts under the TCJA are as follows:
| Salary |
$310,000 |
| Other ordinary income |
$2,000 |
| Adjusted gross income |
$312,000 |
| Itemized deductions* |
($35,000) |
| Taxable income |
$277,000 |
| Regular tax liability |
$55,059 |
*For 2018 through 2025, itemized deductions for state and local income and property taxes are limited to $10,000 (combined).
| Regular taxable income |
$277,000 |
| Itemized deduction for state and local taxes |
$10,000 |
| AMT income before exemption |
$287,000 |
| AMT exemption (no phase-out) |
($109,400) |
| AMT taxable income |
$177,600 |
| AMT liability |
$46,176 |
Thanks to the TCJA, the Bradys won’t be hit with the AMT for 2018. They’ll just owe the regular tax amount of $55,059. So the new tax law benefits this couple.
Tax Day is never a happy day in the Cunningham house. This is the wealthiest hypothetical couple in our examples. So, it’s not surprising that they’ll owe AMT under both the old and new rules.
In 2017, this married joint-filing couple exercised an in-the-money ISO granted by the wife’s employer. The difference between the exercise price of the ISO shares and the trading price on the exercise date (the bargain element) was $50,000. The calculation of the couple’s 2017 regular tax and AMT liabilities are as follows:
| Salary |
$400,000 |
| Other ordinary income |
$12,550 |
| Adjusted gross income |
$412,550 |
| Standard deduction |
($12,700) |
| Personal exemptions |
($8,100) |
| Personal exemption phaseout |
$6,480 |
| Taxable income |
$398,230 |
| Regular tax liability |
$106,633 |
| Regular taxable income |
$398,230 |
| ISO bargain element |
$50,000 |
| Standard deduction |
$12,700 |
| Partially phased-out personal exemptions* |
$1,620 |
| AMT income before exemption |
$462,550 |
| AMT exemption (after partial phase-out) |
($9,088) |
| AMT taxable income |
$453,462 |
| AMT liability |
$123,213 |
* The personal exemption less the phaseout ($8,100 – $6,480).
So, the Cunninghams owe $123,213 in AMT for 2017.
Assuming the same facts for 2018, the calculation of 2018 regular tax and AMT amounts under the TCJA are as follows:
| Salary |
$400,000 |
| Other ordinary income |
$12,550 |
| Adjusted gross income |
$412,550 |
| Standard deduction |
($24,000) |
| Taxable income |
$388,550 |
| Regular tax liability |
$87,715 |
| Regular taxable income |
$388,550 |
| ISO bargain element |
$50,000 |
| Standard deduction |
$24,000 |
| AMT income before exemption |
$462,550 |
| AMT exemption (no phase-out) |
($109,400) |
| AMT taxable income |
$353,150 |
| AMT liability |
$95,052 |
In 2018, this couple is still in the AMT zone and owes $95,052 under the AMT rules. However, there is something for the Cunninghams to be happy about: Their 2018 AMT bill is much lower than their 2017 AMT bill, because the increased AMT exemption for 2018 is fully deductible. Therefore, the new law greatly benefits them, even though they still owe the AMT.
These fictitious examples showcase how the AMT rules have changed for 2018 through 2025 under the TCJA. Although fewer taxpayers will be hit by this dreaded tax under the new law, it still will create headaches for some taxpayers. Consult your tax advisor to discuss customized strategies for minimizing the AMT.
© Copyright 2018. All rights reserved.
Brought to you by: McClanathan, Burg & Associates, LLC
Unfortunately, the Tax Cuts and Jobs Act (TCJA) retains the individual Alternative Minimum Tax (AMT). But there’s a silver lining: The AMT rules now reduce the odds that you’ll owe the AMT for 2018 through 2025. Plus, even if you’re still in the AMT zone, you’ll probably owe less AMT than you did under the old rules.
Here’s what you need to know about the new-and-improved AMT rules for 2018 through 2025.
Under prior law, many high-income taxpayers weren’t affected by the AMT. That’s because, after numerous legislative changes, many of their tax breaks were already cut back or eliminated under the regular income tax rules. So, there was no need to address the AMT. For instance, the passive activity loss rules restrict the tax benefits that can be reaped from “shelter” investments like rental real estate and limited partnerships.
If your income exceeds certain levels, you run into phaseout rules that chip away or eliminate other tax breaks. As a result, higher-income taxpayers had little or nothing left to lose by the time they got to the AMT calculation, while many upper-middle-income folks still had plenty left to lose. Also, the highest earners were in the 39.6% regular federal income tax bracket under prior law, which made it less likely that the AMT — with its maximum 28% rate — would hit them.
In addition, the AMT exemption is phased out as income goes up. This amount is deducted in calculating AMT income. Under prior law, this exemption had little or no impact on individuals in the top bracket, because the exemption was completely phased out. But the exemption phaseout rule made upper-middle-income taxpayers even much more likely to owe AMT under prior law.
Under the TCJA, upper-middle-income people are somewhat less likely to owe the AMT, and if they do, their AMT liabilities are likely to be lower.
Important note: The prior law version of the AMT still applies for your 2017 income tax return, which is due on April 17, 2018.
Think of the AMT as a separate tax system that’s similar to the regular federal income tax system. The difference is that the AMT system taxes certain types of income that are tax-free under the regular tax system and disallows some regular tax deductions and credits.
The maximum AMT rate is 28%. By comparison, the maximum regular tax rate for individuals was 39.6% for 2017 under prior law. The maximum regular tax rate for individuals is reduced to 37% for 2018 through 2025 thanks to the TCJA.
For 2017, the maximum 28% AMT rate kicks in when AMT income exceeds $187,800 for married joint-filing couples and $93,900 for others. For 2018, the maximum 28% AMT rate starts when AMT income exceeds $191,500 for married joint-filing couples and $95,750 for others.
Under the AMT rules, you’re allowed a relatively large inflation-adjusted AMT exemption. This amount is deducted when calculating your AMT income. The TCJA significantly increases the exemption for 2018 through 2025. The exemption is phased out when your AMT income surpasses the applicable threshold, but the TCJA greatly increases those thresholds for 2018 through 2025.
If your AMT bill for the year exceeds your regular tax bill, you must pay the higher AMT amount. Originally, the AMT was enacted to ensure that very wealthy people didn’t avoid paying tax by taking advantage of “too many” tax breaks. Unfortunately, the AMT also hits some unintended targets. (See “Why the AMT Hits Upper-Middle-Income Taxpayers” at right.) The new AMT rules are better aligned with Congress’s original intent.
The following table summarizes the AMT exemptions and phaseout thresholds for 2017:
| Unmarried individuals | Married couples who file jointly | Married individuals who file separately | |
| AMT exemption amount |
$54,300 |
$84,500 |
$42,250 |
| Phaseout starts at |
$120,700 |
$160,900 |
$80,450 |
| Completely phased out at |
$337,900 |
$498,900 |
$249,450 |
The following table summarizes the AMT exemptions and phaseout thresholds for 2018:
| Unmarried individuals | Married couples who file jointly | Married individuals who file separately | |
| AMT exemption amount |
$70,300 |
$109,400 |
$54,700 |
| Phaseout starts at |
$500,000 |
$1 million |
$500,000 |
| Completely phased out at |
$781,200 |
$1,437,600 |
$718,800 |
Under both old and new law, the exemption is reduced by 25% of the excess of AMT income over the applicable exemption amount. But under the TCJA, only those with really high incomes will see their exemptions phased out, while others (including middle-income taxpayers) will benefit from full exemptions.
So, who will be hit by the AMT? Various interacting factors come into play when evaluating whether the AMT will apply or not, but there are several common warning signs to watch for under the old and new rules.
Substantial income. High income can cause the AMT exemption to be partially or completely phased out. The TCJA significantly increases the exemptions and thresholds for 2018 through 2025, reducing or eliminating the AMT hit for most taxpayers.
Large itemized deductions for state and local income and property taxes. Under the prior law, these taxes can be fully deducted for regular federal income tax purposes, but they’re completely disallowed under the AMT rules. Under the TCJA, the regular tax deduction for state and local income and property taxes is limited to $10,000. So, this risk factor has lost most of its teeth.
Multiple personal and dependent exemption deductions. Under the prior law, these deductions are disallowed under the AMT rules. Under the new law, personal and dependent exemption deductions are eliminated. So, this risk factor is gone under the TCJA.
Exercise of “in-the-money” incentive stock options (ISOs). The so-called bargain element (the difference between the market value of the shares on the exercise date and the exercise price) doesn’t count as income under the regular tax rules, but it does count as income under the AMT rules. Unfortunately, this risk factor still exists under the new law.
Significant miscellaneous itemized deductions. Examples of these deductions include investment expenses, fees for tax advice and unreimbursed employee business expenses. Under the prior law, you can write off these deductions for regular tax purposes, but they are disallowed under the AMT rules. Under the TCJA, most miscellaneous itemized deductions are eliminated. So, this risk factor is basically gone.
Interest from “private activity bonds.” This income is tax-free for regular federal tax purposes, but it’s taxable under the AMT rules. Unfortunately, this risk factor still exists under the new law.
Significant depreciation write-offs. Individuals may deduct depreciation expense for fixed assets — such as machinery, equipment, computers, furniture and fixtures — from owning sole proprietorships or investing in S corporations, limited liability companies or partnerships. These assets must be depreciated over longer periods under the AMT rules, which increases the likelihood that you’ll owe the AMT.
Under the new law — for assets placed in service between September 28, 2017, and December 31, 2022 — businesses can deduct the entire cost of many depreciable assets in the first year under both the regular tax rules and the AMT rules. So this risk factor is diminished for newly added assets. However, it continues to exist for older assets that are subject to the depreciation schedules allowed under the prior law.
Though the new law reduces the odds that you’ll owe the AMT for 2018 through 2015, don’t automatically assume you’ll be exempt. Be aware of the risk factors that still apply under the new law, because IRS auditors are specifically trained to find them. If you fail to report your AMT obligation, you’ll owe back taxes, interest, and possibly penalties.
Ask your tax advisor about your AMT exposure. If you’re at risk, some planning strategies may be available to lower your AMT profile.
© Copyright 2018. All rights reserved.
Brought to you by: McClanathan, Burg & Associates, LLC
With conference calls and Web meetings increasingly prevalent, business travel isn’t what it used to be. But if your company is still sending employees out on the road, it remains important to understand the tax ramifications.
Generally, for federal tax purposes, a company may deduct all ordinary and necessary expenses paid or incurred during the tax year in carrying on any trade or business. This includes travel expenses that aren’t deemed lavish or extravagant.
For employees, travel expenses are typically considered a “working condition fringe benefit” and, therefore, not included in gross income. Working condition fringe benefits are any property or service provided to an employee to the extent that, if he or she paid for the property or service, it would be tax-deductible.
Under the Internal Revenue Code, an advance or reimbursement for travel expenses made to an employee under an “accountable plan” is deductible by the employer and not subject to FICA and income tax withholding. In general, an advance or reimbursement is treated as made under an accountable plan if an employee:
By contrast, an advance or reimbursement made under a “nonaccountable plan” isn’t considered a working condition fringe benefit — it’s treated as compensation. Thus, the amount is fully taxable to the employee, and subject to FICA and income tax withholding by the employer.
Although business transportation — going from one place to another without an overnight stay — is deductible, attaining “business travel status” fully opens the door to substantial tax benefits. Under business travel status, the entire cost of lodging and incidental expenses, and 50% of meal expenses, is generally deductible by the employer that pays the bill. What’s more, those amounts don’t equate to any taxable income for employees who, as mentioned, are reimbursed under an accountable plan.
So how does a business trip qualify for business travel status? It must involve overnight travel; an employee traveling away from his or her tax home; and a temporary trip undertaken solely, or primarily, for ordinary and necessary business reasons.
Bear in mind that “overnight” travel doesn’t necessarily mean an employee must be away from dusk till dawn. Any trip that’s long enough to require sleep or rest to enable the taxpayer to continue working is considered “overnight.”
Furthermore, there’s an exception under which local, “nonlavish” lodging expenses incurred while not away from home overnight on business may be deductible if all facts and circumstances so indicate. One factor specified in the regs is whether the employee incurs the expense because of a bona fide employment condition or requirement.
Even if your company has pumped the brakes on business trips, knowing the tax rules can save you valuable dollars on those “must go” travel engagements. We can help you with the crucial details — and particularly in setting up an accountable plan if you don’t already have one.
© 2017
On January 22, President Trump signed into law a short-term government funding bill. It ended the brief government shutdown by funding the federal government through February 8. It also suspends the following Affordable Care Act (ACA) taxes, which were designed to help fund health care coverage provided under the ACA.
Under prior law, for tax years beginning after December 31, 2019, a 40% excise tax was scheduled to apply to any “excess benefit” provided to any employee who’s covered under any “applicable employer-sponsored coverage.” This tax is commonly known as the “Cadillac tax,” because it affects upper-end employer-sponsored insurance coverage. It’s paid by the coverage provider, which is typically the health insurance provider or the entity that administers the plan benefits.
The Cadillac tax was originally scheduled to apply for tax years beginning after 2017 but it has been delayed a number of times, most recently by the 2016 Consolidated Appropriations Act.
The recent government funding law further delays the Cadillac tax for an additional two years. It’s now scheduled to apply for tax years beginning after December 31, 2021.
Under prior law, for tax years beginning after December 31, 2017, a 2.3%-of-sales-price excise tax was to be imposed on the sale of any taxable medical device by the device’s manufacturer, producer or importer.
Originally, the medical device tax was scheduled to apply for sales after December 31, 2012. But it has been suspended, most recently by the 2015 Protecting Americans from Tax Hikes (PATH) Act.
The January 2018 government funding law further delays the medical device tax for an additional two years. It’s now scheduled to apply to sales after December 31, 2019. The delay is retroactive to the beginning of 2018.
Effective for calendar years beginning after December 31, 2013, U.S. health insurance providers generally were supposed to face an annual flat fee. The fee is a fixed amount allocated among all providers based on their relative market share as determined by each entity’s net premiums written for the data year (the year immediately preceding the year in which the fee is paid).
The annual fee on health insurance providers was suspended for 2017 by the 2016 Consolidated Appropriations Act. Now it’s been further suspended by the recent government funding law. The annual fee on health insurance providers is now scheduled to apply in tax years beginning after December 31, 2019.
The ACA individual mandate was permanently eliminated under the Tax Cuts and Jobs Act (but the change isn’t effective yet). This mandate requires taxpayers without coverage by a qualifying health plan to pay a penalty. The elimination of the individual mandate is effective for months beginning after December 31, 2018. So, the individual mandate is in effect for 2017 and 2018.
In addition, the employer mandate for providing health coverage has been retained. This “shared responsibility” mandate imposes a penalty on a “large employer” if it doesn’t offer “minimum essential” health insurance coverage or if one or more of its full-time employees obtains a premium tax credit to help purchase health coverage. The employer mandate applies to for-profit companies, not-for-profit organizations and government entities.
Thanks to the new government funding law, no new ACA-related taxes or penalties are scheduled to go into effect in 2018. For more information on the status of the remaining ACA provisions, contact your employee benefits or tax advisor.
© Copyright 2018. All rights reserved.
Brought to you by: McClanathan, Burg & Associates, LLC
The new Tax Cuts and Jobs Act (TCJA) significantly changes some parts of the tax code that relate to personal tax returns. In addition to lowering most of the tax rates and increasing the standard deduction, the TCJA repeals, suspends or modifies some valuable tax deductions. As a result, millions of Americans who have itemized deductions in the past are expected to claim the standard deduction for 2018 through 2025.
The Tax Cuts and Jobs Act (TCJA) doesn’t suspend or eliminate every tax deduction on the books. Certain deductions survived the chopping block in their current form, or with modifications, including:
Important: The medical expense deduction has been temporarily enhanced under the TCJA. Previously, the threshold for deducting expenses was 10% of adjusted gross income (AGI). But it’s lowered to 7.5% of AGI for 2017 and 2018.
The TCJA provisions for individuals generally take effect for the 2018 tax year and “sunset” after 2025. That means that they technically expire in eight years unless Congress takes further action. In the meantime, you still have a shot at several key tax deductions on your 2017 return before they’re scheduled to expire. This is the return you must file or extend by April 17, 2018.
Here are six popular federal income tax breaks that will be suspended or modified by the new law. Generally, prior law continues to apply to these deductions for your 2017 tax year, so you can write off the expenses with little or no limitation for 2017.
The SALT deduction was a hot-button issue in tax reform talks. Eventually, Congress made a concession to residents of high-tax states, but it may be a hollow victory for some people.
Under prior law, if you itemized deductions you could generally deduct the full amount of your 1) state and local property taxes, and 2) your state and local income taxes orstate and local general sales taxes. Now the TCJA limits the deduction to $10,000 annually for any combination of these taxes, beginning in 2018. But the deduction does you no good if you don’t itemize.
On your 2017 return, you can still opt to deduct the full amount of 1) property taxes, and 2) state and local income taxes or sales taxes. The income tax deduction is usually preferable to the sales tax deduction to those who reside in states with high income tax rates. Conversely, you can elect to deduct general state and local sales tax if your state and local income tax bill is small or nonexistent. If you opt for the sales tax deduction, you can deduct your actual expenses or a flat amount based on an IRS table, plus additional actual sales tax amounts for certain big-ticket items (such as cars and boats).
Home mortgage interest can still be deducted after 2017, but new limitations will result in smaller deductions for some taxpayers.
For 2017 returns, you can deduct mortgage interest paid on the first $1 million of acquisition debt (typically, a loan to buy a home) and interest on the first $100,000 of home equity debt for a qualified residence. It doesn’t matter how the proceeds for a home equity loan are used.
Under the new law, the threshold for acquisition debt is generally reduced to $750,000 for loans made after December 15, 2017. In addition, the deduction for home equity debt is repealed. However, interest on home equity debt that is used to make home improvements might still be deductible if it can be characterized as acquisition debt. We’ll have to wait for IRS guidance on this issue to know for sure. In addition, if home equity debt is used to fund a pass-through business that the taxpayer owns (such as a partnership or S corporation or sole proprietorship), the interest expense may qualify as a deductible business expense (subject to new restrictions on business interest expense deductions under the TCJA).
Homeowners with existing mortgages are “grandfathered” under the new rules, even if the loan is refinanced (up to the existing debt amount). But you can’t deduct any interest on home equity debt that’s used for personal expenditures (such as a new car, a vacation or your child’s college costs) after 2017.
For 2018 through 2015, the TCJA suspends the deduction for casualty and theft losses except for damage suffered in certain federal disaster areas. Under prior law — which applies to your 2017 tax return — unreimbursed casualty losses are deductible in excess of 10% of your adjusted gross income (AGI), after subtracting $100 for each casualty or theft event.
For example, suppose you have an AGI of $100,000 in 2017 and incur a single casualty loss of $21,100. You can deduct $11,000 [$21,100 – $100 – (10% of $100,000)]. In addition, this loss must be caused by an event that is “sudden, unexpected or unusual.”
The new law suspends this deduction except for losses incurred in an area designated by the President as a federal disaster area under the Stafford Act. Special rules may come into play if a taxpayer realizes a gain on an involuntary conversion.
Under prior law, deductions for most miscellaneous expenses were subject to an annual floor based on 2% of AGI. From 2018 through 2025, this deduction won’t be available at all.
For your 2017 return, you can still deduct miscellaneous expenses for the year above 2% of your AGI. These expenses typically relate to production of income, including:
For example, suppose you have AGI of $100,000 in 2017 and incur $5,000 of qualified unreimbursed employee business expenses. You can deduct any expenses over 2% of your AGI ($2,000). So, you can claim $3,000 ($5,000 – $2,000) of unreimbursed business expenses on Schedule A, absent any other limits.
Important note: Under the new law, taxpayers also can’t deduct miscellaneous expenses, including investment fees, for purposes of calculating net investment income. As a result, some taxpayers may pay more net investment income tax (NIIT), starting in 2018.
Under prior law, you could claim qualified job-related moving expenses as an “above-the-line” deduction. Under the new law, this deduction is suspended for 2018 through 2025, except for expenses incurred by active duty military personnel.
To qualify for a deduction for moving expenses on your 2017 return, you must meet a two-part test involving distance and time:
Distance. Your new job location must be at least 50 miles farther from your old home than your old job location was from your former home.
Time. If you’re an employee, you must work full-time for at least 39 weeks during the first 12 months after you arrive in the general area of the new job. The time requirement is doubled for self-employed taxpayers.
Assuming you pass the test, you can deduct the reasonable costs of moving your household goods and personal effects to a new home in 2017, as well as the travel expenses (including lodging, but not meals) between the two locations. In lieu of actual vehicle expenses, you may use a flat rate of $0.17 per mile for 2017.
Currently, alimony paid under a divorce or separation agreement is deductible by the spouse who pays it and taxable to the spouse who receives it. The TCJA repeals the alimony deduction and the corresponding rule requiring inclusion in income for the recipient.
In addition, unlike most of the other tax law changes for individuals, this provision doesn’t go into effect right away. It’s effective for agreements entered into after December 31, 2018. In other words, taxpayers with agreements executed before that cutoff date are allowed to follow the old rules. But payers under post-2018 agreements get no deduction. This change is permanent for post-2018 agreements; it doesn’t sunset after 2025.
This list isn’t complete. But it’s a good starting point for preparing your 2017 income tax return. If you have questions or concerns, contact your tax advisor.
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Brought to you by: McClanathan, Burg & Associates, LLC
As you’ve heard by now, the Tax Cuts and Jobs Act (TCJA) includes a number of changes that will affect individual taxpayers in 2018 and beyond. Significant attention has been given to the reduced tax rates for most individuals and the new limit on deducting state and local taxes. But there is more to the story. Here’s a summary of some of the lesser-known provisions in the new law.
The Affordable Care Act (ACA) requires individuals to pay a penalty if they aren’t covered by a health plan that provides at least minimum essential coverage. That penalty is also known as the “shared responsibility payment.” Unless an exception applies, the penalty is imposed for any month that an individual doesn’t have minimum essential coverage in effect.
The new tax law permanently repeals the ACA penalty for individuals for months beginning in 2019. But the penalty is still in force for all of 2018. The new tax law doesn’t change the ACA mandate for employers, however.
Under prior law (in effect before the TCJA), unearned income of children above an annual threshold was taxed at their parents’ rates if those rates were higher. This so-called “kiddie tax” is imposed on individuals up to age 24 if they’re full-time students. For 2017, the unearned income threshold was $2,100. Unearned income beneath the threshold was taxed at the children’s rates. Earned income was also taxed at the children’s rates.
For 2018 through 2025, the TCJA stipulates that a child’s earned income is taxed at the standard rates for single taxpayers while unearned income is taxed using the rates and brackets that apply to trusts and estates. This change will make the kiddie tax much easier to calculate.
For 2018 through 2025, the TCJA eliminates deductions for personal casualty and theft losses. However, it provides an exception for losses incurred in federally-declared disasters.
Another exception for losses, which aren’t due to federally-declared disasters, allows deductions for personal casualty and theft losses if the taxpayer has personal casualty gains. That happens when insurance proceeds exceed the basis of the damaged, destroyed or stolen property. In this situation, personal casualty and theft losses are allowed up to the amount of the taxpayer’s personal casualty gains.
Under prior law, individuals with high levels of income were subject to a phase-out rule that could eliminate up to 80% of the most common itemized deductions, including the tax breaks for mortgage interest, property taxes and charitable donations.
For 2018 through 2025, the TCJA eliminates the itemized deduction phase-out rule. But some of the itemized deduction rules are changed (and limited) by other provisions in the new law. For example, the TCJA limits the deduction for state and local income and property taxes to a combined total of $10,000 ($5,000 for married people who file separately).
The TCJA also increases the charitable deduction limit for some gifts. Under prior law, the deduction for cash contributions to public charities and certain private foundations was limited to 50% of your adjusted gross income (AGI).
For 2018 and beyond, the new law increases the deduction limit to 60% of AGI. Deductions that are disallowed by the 60% rule can generally be carried forward for five years.
But not all changes to the charitable deduction rules are taxpayer friendly. The TCJA also eliminates deductions for donations to obtain seating rights at college athletic events, for 2018 and beyond.
Under prior law, you could treat 80% of such payments as a charitable donation if:
For 2018 through 2025, the TCJA limits deductions for a year’s out-of-pocket gambling-related expenses and gambling losses (combined) to that year’s gambling winnings.
Under prior law, a professional gambler could deduct out-of-pocket gambling-related expenses as a business expense. Only deductions for actual gambling losses were limited to gambling winnings.
The TCJA is the biggest piece of tax reform legislation that’s been enacted since the landmark Tax Reform Act of 1986. It’s expected to have a major impact on individual taxpayers in 2018. Want to learn more? Consult with your tax advisor; it’s never too soon to plan for this year and beyond.
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