When Congress passed the “Tax Cuts and Jobs Act” (TCJA) in late 2017, it represented the most substantial tax reform legislation since 1986. Year-end planning for individuals can be challenging considering all the many new changes.
Previously Expired Tax Breaks
Historically, Congress has temporarily extended the majority of these tax breaks every few years. However, several popular tax breaks expired at the end of 2017, including: Deduction (up to $4,000) for Qualified Higher Education Expenses; Deduction for Mortgage Insurance Premiums as Qualified Residence Interest; Income Exclusion For Discharge Of Qualified Principal Residence Indebtedness; and the 10% Credit (with a lifetime cap of $500) for Qualified Energy-Efficient Home Improvements (e.g., qualified energy-efficient windows, storm doors, roofing).
Before TCJA, the deduction for qualified business-related “Moving Expenses” was an above-the-line deduction and an employer’s reimbursement of an employee’s qualified moving expenses was a tax-free fringe benefit. Starting in 2018 through 2025, TCJA generally suspends the deduction for “Moving Expenses” and also suspends the income exclusion of employer-reimbursed moving expenses.
Currently, an individual making qualified alimony payments is allowed an “above-the- line” deduction for the payments and the recipient of the payments must include the payments in income. Effective for “Divorce or Separation Instruments” executed after 2018, TCJA repeals altogether the deduction for alimony payments, and the alimony payments will no longer be taxable to the payee. Alimony paid under a divorce instrument executed before 2019 will generally be grandfathered under the existing rules.
Un-Reimbursed Employee Business Expenses
Starting in 2018 and through 2025, “un-reimbursed” employee business expenses are not deductible at all. For example, you will not be able to deduct any of the following business expenses you incur as an “employee” if you are not properly reimbursed by your employer:
Automobile expenses (including auto mileage, vehicle depreciation)
Costs of travel, transportation, lodging, and meals related to the employee’s work
Union dues and expenses
Work clothes and uniforms
Otherwise qualifying employee’s home office expenses
Dues to a chamber of commerce for employment-related purposes
Work-Related education expenses
Job search expenses in the employee’s present occupation
Licenses and regulatory fees
Malpractice insurance premiums
Subscriptions to professional journals and trade magazines related to the employee’s work
Tools and supplies used in the employee’s work
TCJA Suspends the Interest Deduction for “Home Equity Indebtedness”
For 2018 through 2025, individuals may not deduct interest with respect to “Home Equity Indebtedness” (i.e., up to $100,000 of funds borrowed that do not qualify for “Acquisition Indebtedness” but are secured by your principal or second residence).
For example, assuming you have not exceeded the dollar caps on Acquisition Indebtedness, you will still be able to deduct the interest on a second mortgage taken out as a home improvement loan so long as the improvement:
adds to the value of your home that secures the second mortgage
prolongs your home’s useful life or
adapts your home to new uses
Increased Child Tax Credit
Starting in 2018 and through 2025, the recently- enacted Tax Cuts And Jobs Act (“TCJA”) doubles the previous $1,000 Child Tax Credit for each “Qualifying Child” to $2,000, while also significantly increasing the income level where the credit begins phasing out. Under TCJA, the $2,000 Child Tax Credit begins phasing out as an individual’s modified adjusted gross income (MAGI) exceeds $400,000 on a Joint Return (up from the previous $110,000), or exceeds $200,000 for Singles (up from the previous $75,000).
New $500 Family Tax Credit
TCJA creates a new non-refundable “Family Tax Credit” of up to $500 for each person the taxpayer could have claimed as a dependent under prior law but who does not qualify for the $2,000 Child Tax Credit.
Changes to the Alternative Minimum Tax (AMT) for Individuals
Although TCJA retains the “Alternative Minimum Tax” (AMT) for individual taxpayers, starting in 2018 and through 2025, it also offers new relief by: 1) Increasing the AMT exemption amounts for joint filers to $109,400 (up from $86,200) and for single filers to $70,300 (up from $55,400), and 2) Increasing the amount of alternative minimum taxable income where the AMT exemption amount begins to phase out for joint filers to $1 million (up from $164,100) and for single filers to $500,000 (up from $123,100).
“Itemized” Deductions after TCJA
Starting in 2018 and through 2025, TCJA substantially increases the “Standard Deduction” to the following levels:
Joint Return - $24,000 (up from $12,700 in 2017)
Single - $12,000 (up from $6,350 in 2017)
Head-of-Household - $18,000 (up from $9,350 in 2017)
TCJA retains the charitable contribution deduction with the following changes:
From 2018 through 2025, the 50% AGI limitation under prior law for cash contributions to public charities and certain other organizations is increased to 60%
Starting in 2018 (with no sunset date), a charitable contribution deduction is no longer allowed for contributions made to colleges and universities in exchange for the contributor’s right to purchase tickets or seating at an athletic event (prior law allowed the taxpayer to deduct 80% as a charitable contribution)
From 2018 through 2025, TCJA generally suspends the itemized deduction for personal casualty losses and theft losses. However, personal casualty losses attributable to a Federally- declared disaster continue to be deductible as itemized deductions.
Medical Expense Deductions
For tax years beginning in 2017 and 2018, for both regular tax purposes and AMT purposes, a taxpayer may deduct medical expenses to the extent they exceed 7.5% (down from 10%) of his or her AGI. The 7.5% threshold reverts back to 10% after 2018.
$10,000 Cap on State and Local Taxes
From 2018 through 2025, your aggregate itemized deduction for state and local real property taxes, state and local personal property taxes, and state and local income taxes (or sales taxes if elected) is limited to $10,000 ($5,000 for married filing separately).
New Limitation on Deduction for Interest Paid on Home Mortgage “Acquisition Indebtedness”
Subject to certain transition rules, TCJA reduces the dollar cap for Acquisition Indebtedness incurred after December 15, 2017 from $1,000,000 to $750,000 ($375,000 for married filing separately) for 2018 through 2025.
“Premium Tax Credit” Under the Affordable Care Act (ACA) Is Not Repealed
TCJA did not repeal the refundable “Premium Tax Credit” or “PTC” under ACA for eligible low-and-middle income individuals who purchase health insurance through a State or Federal Exchange. The PTC is generally paid in advance directly to the insurer (“Advance Payments”).
20% Deduction for Certain Qualified Income
One of the most significant and far-reaching provisions under TCJA is the new provision that may allow certain individuals to qualify for a 20% Deduction with respect to “Qualified Business Income,” “Qualified REIT Dividends,” and “Publically-Traded Partnership Income.” This deduction is available for tax years beginning after 2017 through 2025.