New Tax Law Presents Challenges for Preparing 2018 Income Tax Returns

On Dec. 22, 2017, the Tax Cuts and Jobs Act (TCJA) was enacted into law. TCJA brought about the largest major tax reform in 31 years and contains a host of tax provisions that impact individuals and businesses. Between now and the tax filing deadline of April 15, 2019,

My Federal Retirement is presenting a series of columns discussing the major changes in the tax code and how these changes impact 2018 federal income tax returns. This column discusses the major changes. Subsequent columns will detail these changes.

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1. Tax rates and brackets

There are seven individual tax brackets under TCJA for the years 2018 – 2025, namely: 10, 12, 22, 24, 32, 35 and 37 percent. Pre-TCJA there were also seven individual tax brackets, namely: 10, 15, 25, 28, 33, 35 and 39.6 percent.

2. Personal exemptions

Under TCJA, the deductions for personal exemptions are eliminated for the years 2018 – 2025. Pre-TCJA, the personal exemptions were available to an individual tax filer and each dependent. For example, for the year 2017 (the last year a personal exemption deduction was available) the deduction for each personal exemption was $4,050, subject to a phase out for higher income individuals.

3. Standard deduction

The standard deduction has increased to $24,000 for married filing joint (MFJ), $18,000 for head of household (HOH) and $12,000 for all other individuals, adjusted for inflation in tax years after 2018. No changes were made to the current law additional standard deduction for the elderly and blind. The standard deduction amounts have nearly doubled to what the amounts were for all filing categories for tax year 2017.

4. Medical expense deduction

The threshold for medical expense deductions is 7.5 percent of adjusted gross income (AGI). In addition, the rule limiting the medical expense deduction for AMT purposes to the excess of such expenses over 10 percent of AGI does not apply. Prior to TCJA, the threshold for deducting medical expenses was 10 percent of AGI for both regular tax and AMT.

5. State and local tax deduction

The itemized deduction for state and local taxes is limited to $10,000 ($5,000 for married filing separate) of the aggregate of: (1) state and local property taxes and (2) state and local income taxes or sales taxes in lieu of income taxes. Before TCJA, real estate taxes and personal property taxes were fully deductible, as were state and local income taxes. This was true unless an individual elected to deduct state and local sales taxes instead.

6. Mortgage interest deduction

Mortgage interest is limited to underlying indebtedness of up to $750,000 incurred after Dec. 15, 2017. For any acquisition indebtedness incurred before Dec. 16, 2017, the deduction for interest on home equity indebtedness is eliminated unless the home equity loan proceeds are used to buy, build or improve one’s principal residence. Prior to TCJA, qualified residence interest, including interest paid on a mortgage secured by a principal residence or a second residence (vacation home), was deductible to the extent the underlying mortgage loans were acquisition indebtedness of up to $1 million, plus home equity indebtedness of up to $100,000.

7. Charitable contribution deduction

The limitation for cash/check contributions to public charities and certain private foundations in 60 percent. Contributions exceeding the limitation are generally allowed to be carried forward and deducted from up to five years, subject to the later year’s ceiling. Prior to TCJA, such contributions were subject to a 50 percent-of-AGI limit with a carry forward period of five years.

8. Charitable donations for college athletic seating rights

No charitable deduction is allowed for any payment to an institution of higher education in exchange for the right to purchase tickets or seating at an athletic event. Previous to the TCJA, an individual could treat 80 percent of a payment as a charitable contribution in which: (1) the amount was paid to or for the benefit of an institution of higher education; and (2) such amount would be allowable as a charitable deduction but for the fact that the individual received, as a result of the payment, the right to purchase tickets for seating at an athletic event in an athletic stadium for such institution.

9. Casualty and Theft Loss deduction

The personal and theft loss deduction is eliminated, except for personal casualty losses incurred in a federally-declared disaster area. Previous to the TCJA, personal casualty or theft losses were deductible if they exceeded $100 per casualty or theft, and to the extent they exceeded 10 percent of an individual’s AGI. Special rules applied to losses incurred in a federally-declared disaster area. All losses reimbursed by insurance were reduced by the amount of insurance.

10. Miscellaneous itemized deductions

The deduction for miscellaneous itemized deductions that are subject to the two percent of AGI floor is eliminated. Miscellaneous itemized deductions include tax preparation fees, investment fees, union dues, and unreimbursed employee business expenses. Prior to TCJA, individuals could deduct expenses for the production of income and unreimbursed employee business expenses, subject to a two percent of AGI floor.

11. Overall limitation on itemized deductions

The overall limitation on itemized deductions is eliminated. Prior to TCJA, higher-income individuals who itemized their deductions were subject to a limitation on these deductions.

12. Moving expenses

Only members of the armed forces on active duty, and their spouses and dependents, who move pursuant to a military order and incident to a permanent change of status, can deduct moving expenses and exclude moving expenses reimbursements. Prior to TCJA, an above-the-line deduction was allowed for moving expenses in connection with work by the individual as an employee or a self-employed individual at a new principal place of work. Employer reimbursements of qualified moving expenses were nontaxable.

13. Qualified bicycle commuting exclusion eliminated

Qualified bicycle commuting reimbursements are taxable. Prior to the TCJA, an employee was allowed to exclude up to $20 per month in employer-provided qualified bicycle commuting reimbursements.

14. Alternative Minimum Tax (AMT)

The 2018 AMT exemption amounts are $109,400 for married filing joint, $70,300 for single or head of household, and $54,700 for married filing separate. The exemptions are reduced by 25 percent of AMT income (AMTI) over $1,000,000 for married filing joint and $500,000 for single, head of household and married filing separate. Amounts are indexed for inflation after 2018. Prior to the TCJUA, the AMT exemption amounts were $86,200 for married filing joint, $55,400 for single or head of household, and $43,100 for married filing separate. The exemptions were reduced by 25 percent of AMTI over $164,100 for married filing joint, $123,100 for single or head of household, and $82,050 for married filing separate.