Monthly Archives: January 2018

How Will The New Tax Law Affect Me?

On December 22, 2017, the Tax Cuts and Jobs Act was signed into law.  It has been touted as one of the most significant overhauls to the Internal Revenue Code since the Tax Reform Act of 1986.  The new law reduces tax rates for corporations and individuals, while repealing many deductions taxpayers were accustomed to, in an attempt to “simplify” the filing of their tax returns.  This post will focus on the changes that will impact individuals.  We’ll follow it up with another that focuses on the changes for business entities at a later date.

One of the most important things to note about the changes outlined below is that many go into effect for tax years ending after January 1, 2018.  As such, most of this will not apply when you file your 2017 tax return during the 2018 filing season (i.e. the ones due 4/17/18).  With that said, under each section you will find a “planning” comment to aid you in preparing for how it may impact the tax return you file in early 2019.

Tax Brackets and Tax Rates
The new law retains the seven tax brackets that previously existed, however, the rates are now 10%, 12%, 22%, 24%, 32%, 35% and 37%. Shown below are how the brackets and rates are applied to each filing status:

Single Taxable Income

$0 to $9,525 × 10.0% minus $0.00 = Tax
$9,526 to $38,700 × 12.0% minus $190.50 = Tax
$38,701 to $82,500 × 22.0% minus $4,060.50 = Tax
$82,501 to $157,500 × 24.0% minus $5,710.50 = Tax
$157,501 to $200,000 × 32.0% minus $18,310.50 = Tax
$200,001 to $500,000 × 35.0% minus $24,310.50 = Tax
$500,001 and over × 37.0% minus $34,310.50 = Tax

Married Filing Joint & Qualified Widow(er) Taxable Income

$0 to $19,050 × 10.0% minus $0.00 = Tax
$19,051 to $77,400 × 12.0% minus $381.00 = Tax
$77,401 to $165,000 × 22.0% minus $8,121.00 = Tax
$165,001 to $315,000 × 24.0% minus $11,421.00 = Tax
$315,001 to $400,000 × 32.0% minus $36,621.00 = Tax
$400,001 to $600,000 × 35.0% minus $48,621.00 = Tax
$600,001 and over × 37.0% minus $60,621.00 = Tax

Married Filing Seperate Taxable Income

$0 to $9,525 × 10.0% minus $0.00 = Tax
$9,526 to $38,700 × 12.0% minus $190.50 = Tax
$38,701 to $82,500 × 22.0% minus $4,060.50 = Tax
$82,501 to $157,500 × 24.0% minus $5,710.50 = Tax
$157,501 to $200,000 × 32.0% minus $18,310.50 = Tax
$200,001 to $300,000 × 35.0% minus $24,310.50 = Tax
$300,001 and over × 37.0% minus $30,310.50 = Tax

Head of Household Taxable Income

$0 to $13,600 × 10.0% minus $0.00 = Tax
$13,601 to $51,800 × 12.0% minus $272.00 = Tax
$51,801 to $82,500 × 22.0% minus $5,452.00 = Tax
$82,501 to $157,500 × 24.0% minus $7,102.00 = Tax
$157,501 to $200,000 × 32.0% minus $19,702.00 = Tax
$200,001 to $500,000 × 35.0% minus $25,702.00 = Tax
$500,001 and over × 37.0% minus $35,702.00 = Tax

Standard Deduction
The new law doubled the amount of the previous standard deduction to the following amounts:

Standard Deductions Per Filing Status

Single or Married Filing Seperate$12,000
Married Filing Jointly of Qualifying Widow(er)$24,000
Head of Household$18,000
Additional age 65 or older, or blind, per person, per event:
MFJ, QW or MFS$1,300
Single or HOH$1,600
Dependents. The standard deduction is the greater of $1,050
or earned income plus $350, up to regular standard deduction

Planning Comment: If you previously  itemized, you may no longer need to due to these increased amounts.  Remember, the IRS lets you take the standard or itemized deduction, whichever is greater.  With that being said,if your itemized deductions (discussed below) do not exceed these amounts, your tax filing just “theoretically” became more simple.

Personal Exemptions
The personal exemption has been repealed and will not be available after tax year 2017.

Planning Comment: If you have a large family and moderate income, this change might hurt you.  Because you will no longer receive an exemption for every member of your household listed on your return (which lowers your taxes), you could see your tax bill increase.

The Alternative Minimum Tax (AMT)
The phaseout thresholds have been increased to $1,000,000 for those filing as married filing joint, and $500,000 for all other taxpayers (other than estates and trusts). These amounts are indexed for inflation.

Alternative Minimum Tax (AMT) Exemptions

Married Filing Jointly & Surviving Spouses$109,400
Married Filing Separately$54,700

Itemized Deductions
With the exception of the items outlined below, all other itemized deductions are repealed. The overall limitation on itemized deductions for upper income individuals is also repealed.

  • Medical Expenses:  For 2017 through 2018, expenses exceeding 7.5% of income are deductible.  This percentage increases to 10% in 2019.
  • State and Local Taxes (SALT): Taxpayers can claim up to a $10,000 deduction for a combination of state and local income tax, sales tax, or real estate taxes.  Foreign real property taxes are no longer deductible.
  • Mortgage Interest:  The deduction for mortgage interest is capped at $750,000 of debt, but is still allowed on a first or second home.  The interest on home equity loans will no longer be deductible.  Interest on up to $1 million of acquisition debt for loans entered into prior to December 15, 2017 is grandfathered and still deductible.
  • Charitable Contributions: Taxpayers who are able to itemize deductions can still include charitable contributions. The current limitation to 50% of income is increased to 60%.
  • Casualty Losses: Deductions for unexpected losses to personal property are no longer deductible unless covered by specific federal disaster declaration.
  • Wagering Losses: The meaning of losses from wagering transactions (i.e. gambling) is clarified to include other expenses incurred by the individual in connection with the conduct of that individual’s gambling activity (e.g. travel expenses to or from a casino).

Planning Comment: There are two big changes/challenges in this area.  First, since the SALT deduction is capped at $10,000, that means that you have to close a gap of anywhere between $2,000 – $14,000 to keep itemizing depending on your filing status.  As such, we suspect that single homeowners may still find themselves itemizing, but those filing as married filing joint may not (unless they pay a significant amount of mortgage interest).

The second area revolves around the removal of the items that were subject to a 2% floor of your income.  So, if you previously deducted any of the items listed below, know that you will not be able to claim them after filing your 2017 tax return:

  • work-related travel, transportation, meal, and entertainment expenses
  • depreciation on a computer or cellular telephone your employer requires you to use in your work
  • dues to a chamber of commerce (or professional societies) if membership helps you do your job
  • education (work-related)
  • home office expenses for part of your home used regularly and exclusively in your work
  • legal fees
  • subscriptions to professional journals and trade magazines related to your work
  • tools and supplies used in your work
  • union dues and expenses
  • work clothes and uniforms (if required and not suitable for everyday use)
  • tax preparation fees

Child Tax Credit
The child tax credit will increase to $2,000 per qualifying child and will be refundable up to $1,400 (subject to phaseouts).   Phaseouts, which are not indexed for inflation, will begin with adjusted gross income of more than $400,000 for those filing as married filing jointly or $200,000 for all other taxpayers.

Non-Child Dependent Credit
A new $500 non-refundable credit covers dependents who don’t qualify for the child tax credit, such as children who are age 17 and above or dependents with other relationships (such as elderly parents). You can’t claim the credit for yourself (or your spouse under married filing jointly status).

Kiddie Tax
The kiddie tax applies to unearned income for children under the age of 19 and college students under the age of 24. Unearned income is income from sources other than wages. Taxable income attributable to net unearned income will be taxed according to the brackets applicable to trusts and estates. The rules for tax applicable to earned income are unchanged.

Student Loan Interest Deduction
For 2018, the maximum amount that you can deduct for interest paid on student loans remains at $2,500. Phaseouts apply for taxpayers with modified adjusted gross income (MAGI) in excess of $65,000 ($135,000 for joint returns) and is completely phased out for taxpayers with modified adjusted gross income (MAGI) of $80,000 or more ($165,000 or more for joint returns).

Section 529 Plans
Distributions of up to $10,000 per beneficiary can be used for tuition expenses for public, private or religious elementary or secondary school. The limitation applies on a per student basis rather a per account basis. Distributions can also be made for expenses related to homeschool.

Discharged of Student Loan Indebtedness
The exclusion from income resulting from the discharge of student loan debt is expanded to include discharges resulting from death or disability of the student.

Educator Expenses
The bill retains the present law above-the-line deduction of $250 (indexed for inflation) for out-of-pocket expenses.

Bicycle Commuting Reimbursement
The exclusion from gross income and wages for qualified bicycle commuting reimbursements up to $20 is suspended.

Moving Expense Deduction
Moving expenses related to a job change are no longer deductible except for active members of the military.

Beginning with divorces in 2019, alimony payments to an ex-spouse are no longer deductible and not taxable to the recipient.

Affordable Care Act
The penalty for failing to maintain minimum essential coverage for individuals (individual mandate) is repealed beginning in 2019.

Estate Tax Exemption
The estate and gift tax exemption is doubled for estates of decedents dying and gifts made after December 31, 2017, and before January 1, 2026.  The exemption increases to $11,200,000 in 2018. The generation skipping transfer (GST) tax exemption is also doubled.

Changes To Be Aware Of When Filing Your 2017 Tax Return

The U.S. tax code is constantly being modified,  which means that each new filing year brings changes that taxpayers need to remember when filing their tax return.  So what changes took place last year, and how will they impact the filing of your tax year (TY) 2017 federal tax return? Read on my dear friend.

Two extra days to file
This change is probably most important to all those procrastinators out there.  April 15th is the traditional day in which we’re all supposed to file our tax return. But this year, filing day has been pushed back to April 17th due to the combination of a weekend and a Washington, D.C. holiday.

The usual April 15th deadline falls on a Sunday this year.  Normally, taxpayers would have to file their tax returns by the following Monday, which would be April 16th.  But the D.C. holiday Emancipation Day is held on Monday, April 16th.  Since Federal law states that Washington, D.C. holidays impact tax deadlines the same way federal holidays do, that gives taxpayers across the country yet even another extra day to file.

Inflation adjustments
For TY 2017, the IRS increased the value of some different tax benefits:

  • The standard deduction was increased to $6,350, $9,350 and $12,700 for those using the single, head of household and married filing jointly filing statuses respectively
  • The maximum earned income tax credit (EITC) rises to $6,318
  • The maximum income limit for the EITC rises to $53,930
  • The foreign earned income deduction rises to $102,100

You might need a driver’s license or state ID to file electronically
Tax fraud has become a growing problem over the years.  To combat this, many states are now requesting or even requiring that taxpayers provide their driver’s license or state ID information if they want to file their state tax returns electronically.  You’ll still be able to submit your state tax returns electronically without providing this information, but doing so might trigger a manual review by your state to verify your identity. This means it could take longer to receive any refund  you are entitled to if you don’t provide this information.

Refunds will be held for those claiming EITC or ACTC until mid February
The IRS will not issue refunds for people claiming the EITC or Additional Child Tax Credit (ACTC) before mid-February. The law requires the IRS to hold the entire refund, even the portion not associated with EITC or ACTC.  Per the IRS, they expect the earliest EITC/ACTC related refunds to be available in taxpayer bank accounts or debit cards starting on February 27, 2018, if direct deposit was used and there are no other issues with the tax return.  This law change, which took effect at the beginning of 2017, helps ensure that taxpayers receive the refund they’re due by giving the IRS more time to detect and prevent fraud.

The IRS will not accept e-filed returns without indicating health coverage compliance
The IRS has stated that it  will not accept electronic tax returns from individuals who do not address the health coverage requirements of the Affordable Care Act (ACA). The IRS will accept electronic returns only when taxpayers indicate whether they had health insurance, had an exemption, or will make a shared responsibility payment.  The good news is that the penalty amounts remain the same for TY 2017.

The floor to deduct medical expenses has been lowered to 7.5 percent of AGI
The threshold for unreimbursed medical expenses increased from 7.5 percent to 10 percent of Adjusted Gross Income (AGI) for most taxpayers in 2014. There was a temporary exemption from January 1, 2013 to December 31, 2016 that allowed individuals age 65 and older and their spouses to still use the lower 7.5 percent floor.  However, due to the Tax Cuts and Jobs Act of 2017, all taxpayers are now subject to the decreased threshold of 7.5 percent.

Do you use your car for business or work?  Well, the standard mileage rate dropped to 53.5 cents per mile, down from 54 cents for 2016.  The rate used for medical and moving mileage drops to 17 cents per mile, down from 19 cents in 2016.  If there is a bright spot, the charitable mileage rate remains unchanged at 14 cents per mile.

Tuition and fees deduction eliminated
This above the line deduction expired at the end of 2016.  While there is a bill proposed by the Senate Finance Committee to “extend” this and other expired tax provisions, it hasn’t been passed as of the writing of this post.  With that being said, you can no longer take a “deduction” for tuition or qualified fees you pay on behalf of yourself or your dependents.  However, the American Opportunity Tax Credit and the Lifetime Learning Tax Credit are still available.  Just noted that they are subject to phase-out limits and some other restrictions that prevent all taxpayers from claiming them.

Exclusion of foreclosure debt forgiveness from income eliminated
Another big change is the elimination of the tax code provision that allowed taxpayers who had discharged indebtedness related to home foreclosure to exclude it from their income.  The qualified principal residence indebtedness exclusion allowed individuals to exclude discharged debt from being reported as income. However, similar to above, this provision expired at the en of 2016 and is another item included in the extender bill mentioned above.

Time running out to claim your TY 2014 refund
April 17, 2018, is the last day to file your 2014 tax return to claim a refund. If you miss the deadline, your refund goes to the U.S. Treasury instead of to you. You also lose the opportunity to apply any refund dollars to another tax year (e.g. 2015, 2016, etc.) in which you owe income tax.

You might need to renew your ITIN if you have one
The 2015 Protecting Americans from Tax Hikes (PATH) Act provided that an Individual Taxpayer Identification Number (ITIN) would expire if an individual fails to file a tax return (or is not included as a dependent on another’s tax return) for three consecutive years.  Under this new rule, taxpayers who have an ITIN that has not been used at least once in the past three years will no longer be able to use that ITIN on a tax return as of January 1, 2017.   Additionally, individuals who were issued ITINs before 2013 are now required to renew their ITINs on a staggered schedule between 2017 and 2020.  So, if any of the above situations apply to you and you need to file a tax return in 2017, you may need to renew your ITIN if it has expired.

Foreign financial disclosures
If you are a U.S. resident, you have to file information about your foreign holdings if they exceed $50,000 at year-end, if you’re a single filer.  Foreign holdings exceeding $75,000 at any point during the year must also be reported. For those who are married filing jointly, the limits rise to $150,000 at any time, and $75,000 at year-end.

For U.S. citizens living abroad, the reporting limits rise substantially. Single filers need only report accounts exceeding $200,000 at year-end, or $300,000 at any point during the year. For joint filers, the limits are $400,000 at year-end, or $600,000 at any time during the year.