Although the Tax Cuts and Jobs Act of 2017 (“TCJA”) may be old news by now, many of the effects will only be felt this year when filing your taxes for 2018. Below is a list of changes that affect individuals and their families, along with changes in how your business will be taxed. Although expected, the implications may surprise you…
Changes for Individuals and Their Families
- Personal Exemption Deduction Gone
Unlike previous years, taxpayers can no longer claim a personal exemption deduction for themselves, their spouse, or dependents. To make up for this deduction, the standard deduction amount and child tax credit will apply, and in some cases, actually result in a larger refund tax return.
- Child Tax Credit
More families with minor children 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 limit at which the child tax credit begins to phase out is increased to $200,000 or $400,000 if married filing jointly. To qualify, the child must have a valid Social Security number.
- Credit for Other Dependents
This new credit (up to $500) is for qualifying dependents other than children who can be claimed for the child tax credit. Taxpayers may claim this credit for children age 17 or over, children with an Individual Taxpayer Identification Number (“ITIN”) or other older relatives in the household. The qualifying dependent must be a U.S. citizen, U.S. national or U.S. resident alien.
- College Savings Plans
ABLE accounts and rollovers from a 529 plan: ABLE accounts are a state-run tax savings program for individuals with disabilities. The amount of contributions allowed to an ABLE account have increased but with special rules in place. It also allows an ABLE account’s designated beneficiary to claim the Saver’s Credit for contributions to the account. Limited amounts of rollover are now allowed from a 529 qualified tuition program account of the designated beneficiary to the ABLE account of the designated beneficiary or a family member.
- New Rules for Divorcees
Gone are the days of deducting alimony payments by the payer spouse. Likewise, alimony can no longer be counted as income of the receiving, or payee, spouse. This change is here to stay and applies to any divorce or separation instrument executed on or before Dec. 31, 2018.
- State and Local Taxes Deduction Limited to $10,000
Total deductible state and local income tax (including sales tax), plus personal and real property taxes is limited to $10,000. Property tax on investment and business property remains deductible.
- Loss of Hobby Expenses
Hobby losses are an excess of income from an activity that the taxpayer cannot prove intended to make a profit. Although they were previously limited in deductibility, they are no longer deductible at all. The income does not qualify for Sec. 199A qualified business income deduction, because hobbies don’t count as a trade or business.
- Deduction for Moving Expenses Gone
The deduction for moving expenses is suspended for 2018 through 2025, except for members of the U.S. military on active duty, who move pursuant to a military order or a permanent change of station.
K-12 Education and 529 Plans: TCJA expanded the type of education for which a taxpayer can use funds from a 529 plan. The new law allows monies from 529 plans to be used to pay up to a total of $10,000 of tuition per beneficiary each year at an elementary or secondary (K-12) public, private or religious school.
Changes on How Your Business Is Taxed
- Business Income Deduction
This new deduction allows owners of sole proprietorships, partnerships, trusts and S corporations to deduct up to 20 percent of their qualified business income. This is available for tax years beginning after December 31, 2017, therefore taxpayers can claim it for the first time on their 2018 tax return.
- Transportation Fringe Benefits (or lack thereof)
Effective January 1, 2018, businesses can no longer take a deduction for transportation fringe benefits (including employee parking at or near their workplace, or location near public transit, or transit passes). Additionally, the bicycle-commuting fringe benefit is now taxable to the employee.
- Lights out on the Entertainment Expenses
TCJA eliminated the deduction for general entertainment, amusement or recreation. Taxpayers may continue to deduct 50 percent of business meals if the taxpayer or their employee is present and the food or beverages are not “lavish or extravagant.” The meals may be provided to a current or potential client, consultant or similar business contact. Food and beverages consumed during entertainment events are not considered entertainment (if purchased separately from the event).
- Excess Business Loss
Under Sec. 461(l) of the TCJA, business losses are now limited to the sum of business income plus $250,000 or $500,000 for married filing jointly. According to the IRS, wage income is considered business income.
- Limitation on Net Operating Loss (NOL)
NOL, often incurred by entrepreneurial businesses, like startups, were previously deductible. Now, NOL created may compensate up to 80% of taxable income. This means that creating large amounts of NOL may be detrimental for a business.
- Rising to the Level of a Business Activity
Activities that rise to the level of a trade or business must do full information reporting. Likewise, anyone holding title to property as tenants in common must file a partnership tax return (if the activity rises to the level of a trade or business).
- Qualified Business Income Deduction – Section 199A
Partnerships, S corporations, trusts, and estates must separately report the amount of qualified business income deduction, as per for Sec. 199A. If these “passthrough” entities don’t report the income separately, the taxpayer shall assume their qualified business income deduction as zero.
- Partnership and S Corporations
Schedule K-1 contains new codes, some changed codes and much more supporting schedule information concerning both these business entities. Therefore, tax returns should carefully be scrutinized as the defaults in tax preparation softwares have changed.
All these changes will surely impact your personal life and how you want to do your business succession planning. Contact OC Estate & Elder Law at (954) 251-0332 or email@example.com for further information on how new changes in the law require an update to your estate plan.