The smell of tax season is in the air. Accountants and tax attorneys alike are sharpening their pencils, replacing the batteries in their calculators, and stocking up on coffee. But something feels different this year. . .
The Tax Cuts and Jobs Act (“TCJA”). Everyone has heard about it, but what exactly does it mean for the individual? This article focuses on the not so subtle changes to the tax code that everyday taxpayers will encounter this tax season.
1. Personal Exemption
Prior to the TCJA, each taxpayer, spouse, and applicable dependent, received a personal exemption that lowered their adjusted gross income. In 2017, individuals born after January 2, 1953, with an income of less than $156,900, received a personal exemption of $4,050. For a family of three, their personal exemption lowered their adjusted gross income by $12,150.
The TCJA effectively and completely removed the personal exemption, thus making the $12,150 deduction for a family of three no longer available.
2. Increased Standard Deduction
Typically, a taxpayer decides whether they are going to itemize a portion of their deductions (more on this later) or use the standard deduction to lower their adjusted gross income. The following chart displays the updated standard deductions based on filing status:
|Married Filing |
|Married Filing Joint||12,700||24,000|
|Head of Household||9,350||18,000|
As you can see, the standard deduction for each filing status is nearly doubled. As a result of this increased standard deduction, millions of taxpayers will no longer itemize. Consequently, there are less federal tax incentives in owning a home, donating to charitable organizations, or taking advantage of other itemized deductions. As often stated, a primary reason behind updating the tax code was simplification of tax filings. This is most likely what they were referring to. With this new act, millions of Americans will no longer need to fill out and submit a Form 1040 Schedule A, thus streamlining the tax filing process.
3. Changes to Itemized Deductions (Form 1040 Schedule A)
Due to the above mentioned increase in standard deductions, millions of Americans will no longer need to file a Form 1040 Schedule A, however, many still will. For that reason, we should review the changes to itemized deductions which could affect individual taxpayers:
A. State and Local Tax Deduction
Prior to the TCJA, a taxpayer could claim a deduction for their state and local taxes paid without limitation. State income taxes withheld from each paycheck, as well as property taxes paid on a home, boat, and/or recreational vehicle (“RV”), were fully deductible. As a result, states with comparably higher income and real property tax rates, such as Maryland, California, New York, New Jersey, Pennsylvania, and Texas, were provided relief through their federal tax return in the form of a larger itemized deduction. Here is an illustrative example:
| State Income Taxes |
Paid to Maryland
|State Real Property Taxes |
Paid to Maryland
|Total State and Local |
In the above example, the entire $20,000 lowers the individual’s adjusted gross income.
After the TCJA, a taxpayer’s state and local income taxes and real property taxes are now capped at $10,000. Here is the same illustration updated for the TCJA:
|State Income Taxes |
Paid to Maryland
|Real Property Taxes |
Paid on Home in Maryland
|Total State and Local Taxes Paid||20,000|
|TCJA Limit on |
State and Local Taxes Paid
| Total State and Local |
Here, taxpayers in high tax states no longer receive federal tax benefits for living in the high tax area. During the 2017 tax year, the Maryland General Assembly heavily debated a way to counteract this update to the federal tax code, but presently has yet to do so.
Also, as an interesting side note, the TCJA no longer allows a deduction for foreign real estate property taxes. Therefore, mortgages on property located outside the United States cannot be deducted.
B. Job Expenses and Certain Miscellaneous Deductions
Prior to the TCJA, unreimbursed employee expenses, tax preparation fees, and miscellaneous deductions were subject to a 2% floor. Any amount of expenses in the foregoing categories that exceeded 2% of the taxpayer’s adjusted gross income were deductible on taxpayer’s Schedule A, and thus lowered their adjusted gross income, and ultimately the tax.
Post TCJA, all of the above mentioned deductions are no longer available. Of the most widely used was unreimbursed employee expenses. Specifically, expenses related to traveling, purchasing and cleaning uniforms, and attending work related seminars are no longer deductible. Moreover, fees paid for tax preparation will no longer be deductible.
C. Interest Paid
26 I.R.C. § 163 allows taxpayers to deduct interest paid or accrued on personal property or educational services. The TCJA thereby limited this deduction for qualified residence interest and disallowed home equity indebtedness unless the loan is acquired to buy, build, or make substantial improvements to a taxpayer’s home.
Prior to the TCJA, alimony was considered income to the recipient pursuant to 26 I.R.C. § 61. Moreover, the payer of the alimony could take a deduction based on 26 I.R.C. § 62.
Post TCJA, alimony is no longer included in gross income and it is no longer a deduction to the payer. Thus, the payer of the alimony is significantly disadvantaged.
Interestingly, the alimony must be related to a divorce decree executed after December 31, 2018. For divorce decrees existing prior to December 31, 2018, alimony is still considered income to the recipient and a deduction to the payer.
An interesting situation arises if a pre-existing alimony award is re-negotiated after December 31, 2018. For more on this, please logon to my FREE webinar: Love and Taxes. How to counsel clients in sticky situations.
5. Moving Expenses
Prior to the TCJA, an individual who was moving closer to new employment could deduct the applicable costs of the move, thus resulting in large deductions for taxpayers relocating closer to their jobs.
Post TCJA, moving expenses are only allowed under limited circumstances. Specifically, active military members moving pursuant to an order can still deduct moving expenses.
6. Educational Savings Plans (529 Plans)
Due to the increase cost of a college education, 26 I.R.C. § 529 (“529 Plan”) was created to allow earnings held within a 529 Plan to be spent tax free when used for college.
The TCJA expanded the application of a 529 Plan and now allows earnings to be tax free when used for tuition in connection with enrollment or attendance at an elementary or secondary public private or religious school. Meaning, a taxpayer can apply the proceeds of a 529 Plan to certain educational costs related to kindergarten through 12th grade, in addition to college. This provides for immense tax planning techniques for parents with children, especially those attending private institutions.
Just as important, the withdrawal limit for kindergarten through 12th grade is $10,000 per year. Beneficiaries in college do not have a limit on the amount of withdrawals available.
7. Child Tax Credit
The TCJA has increased the available child tax credit. A taxpayer may now obtain a credit of $2,000 per qualifying child. This credit is phased out for taxpayers with income over $400,000 when filing Married Filing Joint and $200,000 for other statuses.
The items listed above are some of the most common changes to individual tax returns as a result of the TCJA, and in no way is this an exhaustive list. As a result, it is important, now more than ever, to make sure your tax preparer knows and understand the changes to the tax code, and can accurately implement those changes on your 2018 tax return.
If you have any questions, or just want to talk about taxes, please feel free to give me a call at 410.649.4991 or email me at email@example.com