With provisions changing the income tax for individuals, businesses, tax-exempt organizations, estates and trusts, nearly all taxpayers will be affected—some favorably, some unfavorably.
It has been more than a year since passage of the most sweeping tax legislation in more than 30 years, known as the Tax Cuts and Jobs Act (TCJA). The new tax code is complex, and guidance and interpretation continue to evolve. In this spirit, here’s a quick hit list of some of the most significant changes facing taxpayers when filing (or properly extending) their tax returns for 2018.
The new Form 1040. Form 1040 has been redesigned for 2018 and appears extremely different from your tax returns in prior years. Although it’s been referred to as a postcard, the new design uses a “building block” approach. Form 1040 is supplemented with new Schedules 1 through 6. These additional schedules will be used as needed to complete more complex tax returns.
The short forms, 1040A and 1040EZ, are no longer available. If you or your dependents used one of these forms in the past, you will now file Form 1040.
Who must file. Generally, the amount of income received before a return must be filed has been increased.
Due dates. File your tax return by April 15, 2019. If you live in Maine, Massachusetts or D.C., you have until April 17, 2019, because of the Patriots’ Day holiday in those states and the Emancipation Day holiday in the District of Columbia.
Change in tax rates. For 2018, most tax rates have been reduced. The 2018 tax rates are 10 percent, 12 percent, 22 percent, 24 percent, 32 percent, 35 percent and 37 percent.
Standard deduction amount increased. For 2018, the standard deduction amount has been increased for all filers. The amounts are: single or married filing separately—$12,000; married filing jointly or qualifying widow(er)—$24,000; and head of household—$18,000.
Personal exemption suspended. For 2018, you can no longer claim a personal exemption for yourself, your spouse or your dependents.
Increased child tax credit and additional child tax credit. For 2018, the maximum child tax credit has increased to $2,000 per qualifying child, of which $1,400 can be claimed for the additional child tax credit. In addition, the modified adjusted gross income threshold at which the credit begins to phase out has increased to $200,000 ($400,000 if married filing jointly).
New credit for other dependents. If you have a dependent, you may be able to claim the credit for other dependents. The credit is a nonrefundable credit of up to $500 for each eligible dependent who cannot be claimed for the child tax credit.
Social Security number (SSN) required for child tax credit. Your child must have an SSN valid for employment issued before the due date of your 2018 return (including extensions) to be claimed as a qualifying child for the child tax credit or additional child tax credit. If your child does not qualify you for the child tax credit but has a taxpayer identification number (TIN) issued on or before the due date of your 2018 return (including extensions), you may be able to claim the new credit for other dependents for that child.
Qualified business income deduction. Beginning in 2018, you may be able to deduct up to 20 percent of your qualified business income from your qualified trade or business, plus 20 percent of your qualified real estate investment trust (REIT) dividends and qualified publicly traded partnership (PTP) income. The deduction can be claimed in addition to your standard deduction or itemized deductions.
Special rules for eligible gains invested in Qualified Opportunity Funds. If you have an eligible gain, you can invest that gain into a Qualified Opportunity Fund (QO Fund) and elect to defer part or all of the gain that is otherwise includible in income. The gain is deferred until the date you sell or exchange the investment or December 31, 2026, whichever is earlier. You also may be able to permanently exclude gain from the sale or exchange of an investment in a QO Fund if the investment is held for at least 10 years.
Changes to itemized deductions. For 2018, there have been changes to the itemized deductions that you may claim. These include the following:
- Overall itemized deductions are no longer limited if your adjusted gross income is over a certain limit;
- Deductions of state and local income, sales and property taxes is limited to a combined total deduction of $10,000 ($5,000 if married filing separately);
- Job-related expenses and other miscellaneous itemized deductions that were subject to the 2 percent-of-adjusted-gross-income floor are no longer available;
- Mortgage interest is only deductible on the first $750,000 ($375,000 if married filing separately) of indebtedness, and higher limitations apply if mortgage interest is associated with indebtedness incurred on or before December 15, 2017; and
- Interest on a home equity loan is no longer deductible, and personal casualty or theft losses are no longer deductible unless the loss was incurred within a federally declared disaster area.
Charitable contributions. Deductions for most contributions by cash or check are now limited to 60 percent of your adjusted gross income instead of 50 percent. Certain cash contributions you made for relief efforts for California wildfires are not subject to the 60 percent limit for cash contributions.
Standard mileage rates. The 2018 rate for business use of your vehicle is 54.5 cents a mile. The 2018 rate for use of your vehicle to get medical care or to move is 18 cents a mile. In 2019, the rate increases to 58 cents a mile.
Adoption credit. The adoption credit and the exclusion for employer-provided adoption benefits have both increased to $13,810 per eligible child in 2018. The amount begins to phase out if you have modified adjusted gross income (MAGI) in excess of $207,140, and is completely phased out if your MAGI is $247,140 or more.
Alternative minimum tax (AMT). The exemption amounts have increased. The exemption amount for the AMT is now $70,300 ($109,400 if married filing jointly or qualifying widow(er); $54,700 if married filing separately). The income levels at which the AMT exemption begins to phase out has increased to $500,000 ($1,000,000 if married filing jointly or qualifying widow(er)). As a result, significantly fewer taxpayers will find themselves caught in this secret tax trap.
Section 965 deferred foreign income. If you own (directly or indirectly) certain foreign corporations, you may have to report certain deferred foreign income. You may pay the entire amount of tax due with respect to this deferred foreign income this year or elect to pay in eight installments; or in the case of certain stock owned through an S corporation, elect to defer payment until a triggering event occurs.
Global intangible low-taxed income (GILTI). U.S. shareholders of controlled foreign corporations must include GILTI in income. If you own an interest in a domestic pass-through entity that is a U.S. shareholder of a controlled foreign corporation, a GILTI inclusion related to that interest may apply, even if you are not a U.S. shareholder of the controlled foreign corporation.
Domestic production activities deduction. The domestic production activities deduction has been repealed with limited exceptions.
New or revised deductions for businesses. Certain taxpayers may be eligible for a new deduction of up to 20 percent of qualified business income (QBI) from a qualified trade or business operated directly or through a pass-through entity. Certain limitations apply with respect to taxable income, the type of trade or business, the taxpayer’s taxable income, the amount of W-2 wages paid by the qualified trade or business, and the unadjusted basis immediately after acquisition (UBIA) of qualified property held by the trade or business. Income earned through a C corporation or by providing services as an employee is not eligible for the deduction.
Excess business losses. Noncorporate taxpayers may be subject to excess business loss limitations. An excess business loss is the amount by which the total deductions attributable to all of your trades or businesses exceed your total gross income and gains attributable to those trades or businesses, plus $250,000 (or $500,000 in the case of a joint return).
Net operating losses. Most taxpayers no longer have the option to carryback a net operating loss (NOL). For most taxpayers, NOLs arising in tax years ending after 2017 can only be carried forward. The two-year carryback rule in effect before 2018, generally, does not apply to NOLs arising in tax years ending after December 31, 2017. For losses arising in taxable years beginning after December 31, 2017, the net operating loss deduction is limited to 80 percent of taxable income.
Meal and entertainment expenses. The new law generally eliminated the deduction for any expenses related to activities generally considered entertainment, amusement or recreation. However, under the new law, taxpayers can continue to deduct 50 percent of the cost of business meals if the taxpayer—or an employee of the taxpayer—is present and the food or beverages are not considered lavish or extravagant. Food and beverages that are purchased or consumed during entertainment events will not be considered entertainment if purchased separately from the entertainment, or if the cost is stated separately from the entertainment on one or more bills, invoices or receipts.
Payments under state or local tax credit programs. Business taxpayers who make business-related payments to charities or government entities for which the taxpayers receive state or local tax credits can generally deduct the payments as business expenses.
Transportation fringe benefits. The new law disallows deductions for expenses associated with qualified transportation fringe benefits or expenses incurred providing transportation for commuting (except as necessary for employee safety).
Bicycle commuting reimbursements. Employers can deduct qualified bicycle commuting reimbursements as a business expense for 2018 through 2025. The new tax law suspends the exclusion of qualified bicycle commuting reimbursements from an employee’s income for 2018 through 2025. Employers must now include these reimbursements in the employee’s wages.
Moving expenses. Employers must now include moving expense reimbursements in employees’ wages. The new tax law suspends the former exclusion for qualified moving expense reimbursements. Active duty members of the U.S. armed forces can still exclude moving expenses from their income.
Achievement awards. Special rules allow an employee to exclude achievement awards from wages if the awards are tangible personal property. An employer also may deduct awards that are tangible personal property, subject to certain limits.
Changes to depreciation and expensing for businesses. The Tax Cuts and Jobs Act changed some laws regarding depreciation and expensing. A few highlights include:
- Businesses can immediately expense more under the new law.
- Temporary 100 percent expensing for certain business assets (first year bonus depreciation).
- Changes to depreciation limitations on luxury automobiles and personal use property.
- Applicable recovery period for real property.
New employer credit for paid family and medical leave. This general business credit is a percentage of the amount of wages paid to a qualifying employee while on family and medical leave for up to 12 weeks per taxable year. The credit is generally effective for wages paid in taxable years beginning after December 31, 2017, and before January 1, 2020.
Rehabilitation tax credit. The new law affects the rehabilitation tax credit for amounts that taxpayers pay or incur for qualified expenditures after December 31, 2017. It repeals the 10 percent credit for buildings placed in service before 1936. It keeps the 20 percent credit for expenses to rehabilitate a certified historic structure, but requires taxpayers to prorate the 20 percent credit over five years instead of in the year they placed the building into service. Certain transition rules apply.
Small-business accounting methods. Small-business taxpayers with average annual gross receipts of $25 million or less in the prior three-year period may use the cash method of accounting. The law expands the number of small-business taxpayers eligible to use the cash method of accounting and also exempts these small businesses from certain accounting rules for inventories, cost capitalization and long-term contracts.
S corporation to C corporation. An eligible terminated S corporation that is required to change from the overall cash method to an overall accrual method of accounting because of a revocation of its S corporation election that makes this method change for the C corporation’s first taxable year after such revocation must use a six-year section 481(a) adjustment period.
Like-kind exchanges. Deferral of gain or loss now applies only to exchanges of real property and not to exchanges of personal or intangible property, except for real property held primarily for sale. To qualify as a like-kind exchange, a taxpayer must hold the real property for productive use in a trade or business or for investment. A transition rule permits like kind exchanges if the taxpayer began the exchange by transferring property or receiving replacement property on or before December 31, 2017.
Wrongful IRS levy. Individuals and businesses have more time to file an administrative claim or to bring a civil action for wrongful levy or seizure. The time limit has been extended from nine months to two years.
This year, at the top of everyone’s mind is how tax reform will affect their individual and business tax situation, both current and prospective. With provisions changing the income tax for individuals, businesses, tax-exempt organizations, estates and trusts, nearly all taxpayers will be affected—some favorably, some unfavorably. While many of the corporate changes noted herein are permanent, most of the individual provisions included in the new law are currently set to expire after 2025. As major legislative developments and opportunities emerge, we are always available to discuss the impact of a new or pending tax law on your personal or business situation. If you would like to discuss the tax law changes indicated herein or have other concerns, please do not hesitate to contact Michael A. Gillen or the practitioner with whom you are in regular contact.
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Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.