Provisions of Tax Cuts and Jobs Act

Transcription

1 Provisions of Tax Cuts and Jobs Act i

2 Contents Introduction to the Course... 1 Course Learning Objectives... 1 Domain 1 Provisions of Tax Cuts and Jobs Act... 2 Introduction... 2 Domain 1 Learning Objectives General Topics New Individual and Capital Gains Tax Rates Standard Deduction Increased and Filing Requirements Changed Standard Deduction for Dependents Standard Deduction for Blind and Senior Taxpayers Standard Deduction Eligibility Filing Requirements Personal Exemption Temporarily Reduced to Zero Income/Adjustments to Income Alimony Moving Expense Deduction/Reimbursement Moving Expenses in Military Relocations Roth Recharacterization Schedule C Provisions Entertainment Expenses Food and Beverage Expenses Section 179 Expense Limits % Expensing Qualified Property Luxury Auto Limits Listed Property Updates Itemized Deductions Schedule A Medical Expense AGI Threshold State and Local Tax Deductions Home Mortgage Interest Deduction Exception for Binding Contracts Indebtedness Refinancing Charitable Contributions % AGI Limit for Cash Contributions Deduction for Athletic Tickets Exception to Contemporaneous Written Acknowledgement Content and Timing of Contemporaneous Written Acknowledgement Casualty and Theft Loss Deduction Miscellaneous Itemized Deductions Subject to 2% of AGI Threshold Itemized Deductions Phase-Out Amounts Credits Enhanced Child Tax Credit Increase in Amount to $2, Child Tax Credit Phaseout and Refundable/Nonrefundable Amounts Social Security Number Requirement Partial Child Tax Credit for Other Than Qualifying Child with SSN...13 Review #1 Tax Cuts and Jobs Act Overview Topics Alternative Minimum Tax (AMT) Alternative Minimum Tax Exemption Amount Increased Pass-Through Deduction for Qualified Trade or Business Qualified Trade or Business Exception for Specified Service Businesses Based on Taxpayer s Income...15 ii

3 1.6.3 Kiddie Tax Modifications Section 529 Changes ABLE Account Changes Tax-Deferred Account ABLE Account Distributions ABLE Account Contributions TCJA Changes to ABLE Accounts Additional Designated Beneficiary Contributions Permitted Saver s Credit Discharge of Student Loan Indebtedness Net Operating Loss Changes Affordable Care Act (ACA) Provisions Individual Requirement to Maintain Health Coverage Penalty for Failure to Maintain Health Coverage Penalty Examples Exemptions from Penalty for Failure to Maintain Health Coverage Individual Mandate Penalty 2019 and Later Changes in Employee Fringe Benefits Real Property Depreciation...22 Review #2 Tax Cuts and Jobs Act...22 Answers to Review Quizzes Review # Review #6... Error! Bookmark not defined. Glossary Index Appendix A... 3 iii

4 Introduction to the Course Each year, various limits affecting income tax return preparation and tax planning are affected by inflation-related changes. In addition, the Tax Cuts and Jobs Act of 2017 will significantly affect tax planning and may also affect taxpayers income tax liability. This course will examine many of those changes. The Annual Federal Tax Refresher course is designed to meet the requirements of the IRS voluntary Annual Filing Season program. It discusses new tax law and recent updates for the 2019 filing season, provides a general tax review, and examines important rules governing tax return preparer ethics, practices and procedures. In organizing this course, the term "domain" is used in place of the more common "chapter" to more closely follow the language of the IRS Annual Federal Tax Refresher course outline. Course Learning Objectives Upon completion of this course, you should be able to: Identify the principal individual income tax changes brought about by the Tax Cuts and Jobs Act of 2017; Apply the inflation-adjusted and other limits to the proper preparation of taxpayers income tax returns; Calculate nonexempt taxpayers tax penalty under the Affordable Care Act for failure to maintain healthcare coverage; Recognize the federal income tax filing statuses and the criteria for their use; Identify the types of income that must be recognized; Apply the tax rules to the various credits and adjustments to income that are available to taxpayers; Recognize the penalties that may be imposed on a preparer for failing to meet ethical and practice standards in preparing tax returns; and Identify the duties and restrictions imposed on tax preparers under Circular

5 Provisions of Tax Cuts and Jobs Act Introduction In the closing days of 2017 Congress passed the first major tax reform legislation in 30 years, known as the Tax Cuts and Jobs Act of 2017 (TCJA). The changes relating to the Act s provisions affecting individual taxpayers are temporary in nature and generally apply beginning in 2018 and ending on December 31, Accordingly, most of the provisions of the Act applicable to individual taxpayers expire for years beginning in Learning Objectives When you have completed the domain 1 text addressing the principal individual provisions of the Tax Cuts and Jobs Act, you should be able to: Recognize the Act s effect on the individual income and capital gains tax rates, standard deductions, filing requirements and exemptions resulting from passage of the Tax Cuts and Jobs Act; Describe the Act s impact on the tax treatment of alimony, taxpayer moving expenses and Roth recharacterization rules; List the changes with respect to Schedule C provisions; Identify the changes affecting the itemized deductions on Schedule A; Understand the provisions of the enhanced child tax credit; Describe the Kiddie Tax modifications, the changes to the AMT and the 529 plan changes; Recognize the factors considered in the pass-through deduction for a qualified trade or business and the changes affecting ABLE accounts; List the changes affecting the discharge of student loan indebtedness and net operating losses; Describe the Act s effect on the ACA s requirement to maintain health coverage and its changes to employee fringe benefits; and Identify the principal changes to the rules governing real property depreciation. 1.1 General Topics New Individual and Capital Gains Tax Rates 2

6 TCJA Income Tax Brackets 2018 TCJA Bracket for Income in Excess of Tax Bracket MFJ HOH Unmarried MFS Estates & Trusts 10% $0 $0 $0 $0 12% $19,050 $13,600 $9,525 $9,525 22% $77,400 $51,800 $38,700 $38,700 24% $165,000 $82,500 $82,500 $82,500 $2,550 32% $315,000 $157,500 $157,500 $157,500 35% $400,000 $200,000 $200,000 $200,000 $9,150 37% $600,000 $500,000 $500,000 $300,000 $12,500 Prior Law Income Tax Brackets Former Law Tax Bracket Bracket for Income in Excess of MFJ HOH Unmarried MFS Estates & Trusts 10% $0 $0 $0 $0 15% $19,050 $13,600 $9,525 $9,525 25% $77,400 $51,800 $38,700 $38,700 $2,600 28% $156,150 $133,850 $93,700 $78,075 $6,100 33% $237,950 $216,700 $195,450 $118,975 $9,300 35% $424,950 $424,950 $424,950 $212, % $480,000 $453,350 $426,700 $240,025 $12,700 The TCJA generally continues the maximum tax rate imposed on net capital gain and qualified dividends. Accordingly, net long term capital gain and qualified dividends are generally taxed at 0%, 15% or 20% depending on taxable income and filing status as shown in the chart below: 2018 Capital Gains/Qualified Dividend Tax Rates Based on Taxable Income & Filing Status Applicable Joint Return Head of Married Filing Single Estates & 3

7 Maximum Rate and Surviving Spouse 0% Less than $77,200 Household Separately Trusts Less than $51,700 Less than $38,600 Less than $38,600 Less than $2,600 15% $77,200 $51,700 $38,600 $38,600 $2,600 20% $479,000 $452,400 $239,500 $425,800 $12, Standard Deduction Increased and Filing Requirements Changed The Act has increased the standard deduction for Under the new law, standard deductions are: $24,000 for married couples whose filing status is married filing jointly and surviving spouses; $12,000 for singles and married couples whose filing status is married filing separately ; and $18,000 for taxpayers whose filing status is head of household Standard Deduction for Dependents A taxpayer who can be claimed as a dependent is generally limited to a smaller standard deduction, regardless of whether the individual is actually claimed as a dependent. For 2018 returns, the standard deduction for a dependent is the greater of: $1,050; or The dependent s earned income from work for the year plus $350 (but not more than the standard deduction amount, generally $12,000) Standard Deduction for Blind and Senior Taxpayers Elderly and/or blind taxpayers receive an additional standard deduction amount added to the basic standard deduction. The additional standard deduction for a blind taxpayer a taxpayer whose vision is less than 20/200 and for a taxpayer who is age 65 or older at the end of the year is: $1,300 for married individuals; and $1,600 for singles and heads of household. The additional standard deduction for taxpayers who are both age 65 or older at year-end and blind is double the additional amount for a taxpayer who is blind (but not age 65 or older) or age 65 (but not blind). For example, a 65 year-old single blind taxpayer would add $3,200 to his or her usual standard deduction: $1,600 for being age 65 plus $1,600 for being blind. ($1,600 x 2 = $3,200). Thus, his or her standard deduction would normally be $15,200. ($12,000 + $3,200 = $15,200) Standard Deduction Eligibility The general rule with respect to deductions is that a taxpayer may choose to take a standard deduction or itemize his or her deductions. Although that general rule applies in the case of most taxpayers, certain taxpayers are ineligible to take the standard deduction and must itemize. Taxpayers who are ineligible to take the standard deduction are the following: Taxpayers whose filing status is married filing separately and whose spouse itemizes deductions; Taxpayers who are filing a tax return for a short tax year due to a change in their annual accounting period; and Taxpayers who were nonresident aliens or dual-status aliens during the year Filing Requirements The income thresholds at which taxpayers are required to file a federal income tax return has traditionally been determined as the sum of the standard deduction and the applicable personal exemption. However, for the 2019 tax filing season (2018 tax year), the standard deduction has been increased and (as noted next) the personal exemption has been eliminated by being reduced to zero. 4

8 Because of the reduction to zero of the personal exemption, the gross income thresholds at which taxpayers are required to file a federal income tax return for 2018 income is equal to the standard deduction, as shown in the threshold comparison below: Filing Status Age at End of Year 2017 Gross Income Filing Threshold 2018 Gross Income Filing Threshold Single Under 65 $10,400 $12, or older $11,950 $13,600 Under 65 (both spouses) $20,800 $24,000 Married filing jointly 65 or older (one spouse) $22,050 $25, or older (both spouses) $23,300 $26,600 Head of household Under 65 $13,400 $18, or older $14,950 $19, Personal Exemption Temporarily Reduced to Zero Personal exemptions are temporarily reduced to zero under TCJA for taxable years beginning after December 31, 2017, and before January 1, Skip Partial Child Tax Credit for Other Than Qualifying Child with SSN In addition to increasing the amount of the child tax credit that may be applied, the TCJA also expanded the credit. Under this credit expansion, a taxpayer may be eligible for a partial Child Tax Credit of up to $500 with respect to: A dependent other than a child a dependent parent or sibling, for example; and A qualifying child for whom a credit is disallowed solely because the taxpayer failed to include the child s Social Security number on the tax return for the taxable year. Click here to return to Child Tax Credit due diligence at Review #1 Tax Cuts and Jobs Act 1. A taxpayer s 16 year-old dependent son earned $7,000 in What is the standard deduction for him? A. $7,350 B. $6,350 C. $1,050 D. $0 2. Shirley and Jack file their income tax return as married filing jointly and take the standard deduction. What is their 2018 standard deduction if Jack is age 66 and Shirley is age 64 and blind? A. $24,000 B. $25,300 C. $26,600 D. $27,900 5

9 Answers to Review Quizzes Review #1 Question #1 Feedback A. Your answer is correct. The taxpayer s standard deduction for the dependent son is $7,350. For 2018 returns, the standard deduction for dependents is the greater of a) $1,050, or b) the dependent s earned income from work for the year plus $350 (but not more than the standard deduction amount, generally $12,000). B. Your answer is incorrect. A dependent s standard deduction for 2018 may generally be as high as his or her earned income plus $350. C. Your answer is incorrect. That is the minimum standard deduction for a dependent. Since the dependent had an income, the minimum standard deduction amount does not apply in this case. D. Your answer is incorrect. Despite the dependent s earnings, the taxpayer is still entitled to take a standard deduction for the dependent. Question #2 Feedback A. Your answer is incorrect. Shirley and Jack would be entitled to a $24,000 standard deduction in 2018 if they were neither age 65 nor blind. However, Jack is age 66 and Shirley is blind. B. Your answer is incorrect. A married taxpayer who is age 65 or blind in 2018 is entitled to an additional standard deduction of $1,300. The answer given indicates that only one additional standard deduction amount was taken. C. Your answer is correct. Shirley and Jack are entitled to a $24,000 standard deduction based on their married filing jointly filing status. However, they are entitled to an additional $1,300 standard deduction for Shirley because she is blind and an additional $1,300 standard deduction for Jack because he is age 65 or older. D. Your answer is incorrect. Shirley and Jack are both entitled to an increased standard deduction based on Jack s age and Shirley s blindness. However, the answer given is incorrect because it assumes that Shirley is both blind and age 65, but she is age 64 and not yet entitled to the additional standard deduction normally available at age Skip

10 Glossary Additional child tax credit Adjustment to income American opportunity credit Capital asset Capital gains and losses Child and dependent care tax credit Child tax credit Deduction Dependent Dividend Earned income tax credit The additional child tax credit is a credit a taxpayer with qualifying children may claim if unable to claim the full amount of the child tax credit. An adjustment to income is a deduction that reduces a taxpayer s income to arrive at the adjusted gross income. It is also called an "above the line" deduction, meaning it is taken above the line on the tax form for adjusted gross income. The American opportunity credit is a tax credit available only for the first four years of postsecondary education during which time the student must be pursuing a degree or other recognized credential. A capital asset includes everything owned by a taxpayer and used for personal purposes, pleasure, or investment. A capital gain or loss is the gain or loss sustained by a taxpayer on a sale or trade of a capital asset. The child and dependent care credit is a nonrefundable tax credit available to a taxpayer who pays someone for the care of a qualifying person while the taxpayer is working or looking for work. The child tax credit is a credit of up to $2,000 for each qualifying child. A dollar amount that reduces the taxpayer s taxable income. A dependent is a taxpayer s qualifying child or qualifying relative. A dividend is a distribution of money, stock, or other property paid to a taxpayer by a corporation or by a mutual fund. The earned income credit usually referred to simply as EIC or EITC is a refundable tax credit for certain lower-income working taxpayers who meet income, filing status and other requirements. Estimated tax payment Estimated tax payments are amounts paid quarterly by a taxpayer to the state and local governments to cover income taxes on amounts not subject to tax withholding. Filing status Filing status refers to one of the five statuses a taxpayer falls into and depends on whether the taxpayer is single or married and on the taxpayer s 7

11 family situation. It is determined on the last day of the taxpayer s tax year, which is December 31 for most taxpayers. Health insurance premium tax credit Individual shared responsibility payment Interest Lifetime learning credit Pass-through deduction Pension Roth IRA Self-employment income Standard deduction Student loan interest deduction Tax credit Tax Cuts and Jobs Act of 2017 (TCJA) Tax withholding Traditional IRA A tax credit available to individuals who meet specified income, coverage and other criteria to enable them to purchase a qualified health plan through the Health Insurance Marketplace. The individual shared responsibility payment is a tax penalty payable by a non-exempt taxpayer who fails to maintain minimum essential health coverage. Interest is the fee paid by a borrower to a taxpayer for the use of money. Interest is normally taxable to the receiving taxpayer. The lifetime learning credit is a tax credit available for all years of postsecondary education as well as for courses to acquire or improve job skills. A deduction authorized by the Tax Cuts and Jobs Act of 2017 equal to 20% of qualified business income available to businesses organized as other than regular corporations An income received from an employer-sponsored qualified retirement plan. A Roth IRA is a personal retirement savings plan, funded by an annuity or trust/custodial account, which provides income tax deferral and may provide tax-free distribution of earnings. It does not provide for contribution deductibility. Self-employment income is income earned by a taxpayer in business for himself or herself. The standard deduction is a dollar amount that reduces the taxpayer s taxable income. It is a benefit that eliminates the need for many taxpayers to itemize actual deductions, such as medical expenses, charitable contributions, and taxes, on Schedule A (Form 1040). The student loan interest deduction is a special deduction allowed for interest payments made on a student loan used solely to pay higher education expenses up to a maximum deduction of $2,500. A dollar amount that directly reduces the taxpayer s tax liability. Tax reform legislation that, among other things, authorized a pass-through deduction, generally lowered taxes for individuals and businesses, temporarily suspended exemptions and increased standard deductions. Tax withholding is the employer s retention of funds from an employee s salary or wages and paid to the government to pay the Income tax due. A traditional IRA is a personal retirement savings plan, funded by an annuity or a trust that meets certain requirements, which may permit tax-deductible contributions and tax-deferral of earnings. 8

12 Index 401(k) plans, (b) tax sheltered annuity plans, 61 ABLE accounts, 17 ABLE accounts, saver's credit, 18 Accountable plan, reimbursements and allowances, 44 Active participant, 65, 100 Actual expense method, 50 Advance commissions, 44 Age 55+ HSA contributions, 41 Age rule for taxpayers without a qualifying child, 73 Alimony payments, 5 American opportunity credit - figuring the credit, 68 American opportunity credit eligibility, 67 American opportunity maximum tax credit, 67 Amounts received as an annuity, 63 AMTI exemption, 15 Annuity starting date, 63 Archer MSA, 35, 36, 37, 38, 39 Archer MSA benefits, 36 Archer MSA distribution tax penalty, 39 Archer MSA distributions, 37 Archer MSA qualified medical expenses, 37 Archer MSA transfer at death, 38 Archer MSA transfer due to divorce, 37 Average annual wage limitation, 34 Benchmark plan, 20, 33 Bonus depreciation, 7 Bonuses and awards, 44 Capital assets, 64 Capital gain or loss, 64 Cash value, deferred annuity, 63 Casualty or theft loss deduction, 11 Charitable contributions, 9 Child and dependent care credit, 66 Child tax credit, 12 Child tax credit, Social Security number requirement for, 13 Chronically -ill, HIPAA definition, 29 Contemporaneous written acknowledgment, charitable deductions, 10 Cost-of-living allowances, U.S. government, 45 Course learning objectives, 1, 2 Deduction for athletic tickets, 10 Deferred annuity surrender, 63 Deferred annuity withdrawal, 63 Depreciation, 51, 52 Designated Roth account, 62 Differential wage payments, 45 Direct expenses, 50 Disability, 59 Earned income, 43 Earned income credit, 70, 105 Economic Growth and Tax Relief Reconciliation Act of 2001, 99 Education savings bond program, 26, 27, 28 Education savings bond program eligibility, 28 EIC adjusted gross income limits, 70 EIC due diligence standards, 86 EIC Income Limits, 70 EIC qualifying child of another taxpayer rule, 73 EIC qualifying child rules, 71 EIC rules applicable to a taxpayer with no qualifying child, 73 EIC, figuring the amount of the credit, 70 Elective deferrals, 62 Eligibility to receive health insurance premium tax credits, individuals, 20 Eligible educational institution, education savings bond program, 27 Employee fringe benefits, changes under TCJA, 22 Employer-sponsored retirement plan, 65 Entertainment expenses, deduction disallowed, 6 Estimated taxes, 75 Expenses deductible by all homeowners, 51 Expenses deductible by homeowners using homes for business, 51 Extension of the time to file, 77 Extension of time to file, individuals serving in a combat zone, 78 Failing to maintain minimum essential coverage, penalty for, 20, 105 Failure to take a required minimum distribution, 61 Federal income tax return due dates, 77 Federal poverty level, 32 FIFO tax treatment, 58, 99 Food and beverage expenses, 6 Foster child (definition for EIC), 72 Gross income limitation, 53 Health FSA contribution limitation, 32 Health Insurance Portability and Accountability Act, 35 Health insurance premiums, 59 Health savings accounts, 39 High-deductible health insurance policy, 36, 39 Home mortgage interest deduction, 8 Home-office deduction limitation, 52 Home-office deduction, qualifying for, 49 HSA account transfer at death, 42 HSA account transfer due to divorce, 41 HSA benefits, 39 HSA distribution tax penalties, 43 9

13 HSA distribution tax treatment, 42 HSA distributions, 41 HSA excess contribution, 41 HSA high-deductible health plan, 40 immediate annuity, 63, 64 Income filing thresholds, 4 Income tax withholding, 74 Indirect expenses, 50 Investment in the contract, 63, 64 Kiddie tax modifications, 16 Large employer shared responsibility, 34 Lifetime learning credit - figuring the credit, 70 Lifetime learning credit eligibility, 69 Lifetime learning credit maximum, 68 Listed property, 8 Luxury auto depreciation limits, 7 Medical and dental expense deduction, AGI threshold, 8 Medical transportation costs, 26 Miscellaneous itemized deductions, 11 Moving expenses, deduction for, 5 Moving expenses, military relocation, 5 Net operating loss (NOL), TCJA changes, 19 Nonaccountable plan, reimbursements and allowances, 44 Nonqualified annuity, 63 Nonqualified deferred compensation plans, 45 Nonrefundable tax credit, 18, 31 Overall limitation on itemized deductions, 11 Partial child tax credit, 14 Pass-through business deduction, 15 Payment of amounts owed, options, 75 Percentage of the home used for business, 50 Personal exemptions, 4 Premature distribution penalty, 57 Premature distributions, 57, 64 Qualified annuity, 63 Qualified distribution, 58 Qualified education expenses, education savings bond program, 26 Qualified employee plan, 62 Qualified long term care insurance benefits (tax free), 30 Qualified long term care insurance premium deduction, 29 Qualified property, 7 Qualified Roth distribution, 62 Qualified U.S. savings bonds, 26 Qualifying child of another taxpayer rule, 71, 73 Qualifying child of more than one person rule, 71 Real property depreciation rules, changes under TCJA, 22 Refundabl e tax credits for lower income individuals, 32, 105 Reimbursement or allowance, 44 Relationship, age, residence and joint return tests, 71 Required beginning date, 58 Required minimum distributions, 58, 60 Requirement to maintain minimum essential coverage, exemptions from, 22 Retirement savings contribution tax credit, 18, 30 Roth IRA, 18, 31, 58, 59, 106 Roth IRA recharacterization, 5 Savings Incentive Match Plan for Employees, 60 Schedule C provisions, 6 Section 179 expense limits, 6 Self-employed income, 48 Self-employed taxpayers, 47 Series of substantially equal periodic payments, 58, 59 Severance pay, 46 Short-term or long-term capital gain/loss, 64 SIMPLE employee elective contributions, 60 Simplified method, 52 Small employer health insurance premium tax credit, 33 Social Security benefits, taxability, 55 Social Security number, 71 Social Security taxable earnings limit, 30 Standard Deduction Eligibility, 4, 5 Standard deduction for elderly and/or blind taxpayers, 3 Standard deduction ineligibility, 4 Standard deduction, dependent, 3 Standard mileage rates, 25 State and local tax deduction, 8 Stock appreciation rights, 46 Student loan indebtedness, discharge of, 19 Student loan interest tax deduction maximum, 106 Tax refund options, 76 Taxable distributions from individual retirement arrangements (IRAs), qualified plans and annuity contracts, 56 Taxpayer s expected contribution, 20, 33, 103 TCJA Capital Gains/Qualified Dividend Tax Rates, 3 TCJA Income Tax Brackets, 2 Tiebreaker rules when more than one person has same qualifying child, 72 Tip income, 46 Traditional IRA, 57, 59 Traditional IRA distributions at death, 57 Traditional IRA distributions during disability, 57 Traditional IRA distributions for first-time homebuyer distributions, 58 Traditiona l IRA distributions for health insurance premiums, 57 Traditional IRA distributions for qualified higher education expenses, 58 Traditional IRA payments for medical care, 57 Tuition Savings Plan change, 17 2

14 Appendix A References to Applicable Standards and Best Practices for Safeguarding Taxpayer Data Resource Getting Noticed: Writing Effective Financial Privacy Notices Available at -noticed-writing-effectivefinancial -privacy -notices/ Information Compromise and the Risk of Identity Theft: Guidance for Your Business FTC Facts for Business: Financial Institutions and Customer Information: Complying with the Safeguards Rule FTC Disposal Rule (2005) FTC Business Alert: Disposing of Consumer Report Information? Rule Tells How Security Check: Reducing Risks to Your Computer Systems NIST SP , Guide for Developing Security Plans for Federal Information Systems: Provides guidance on developing an Information Security Plan and includes a sample plan in Appendix A. NIST SP , Recommended Security Controls for Federal Information Systems and Organizations NIST SP Revision 2, Computer Security Incident Handling Guide NIST SP Revision 1, Guide for Conducting Risk Assessments -advice/businesscenter/guidance/data -breach-response-guide-business. -advice/business - center/guidance/financial -institutions -customerinformation -complying. -advice/business - center/guidance/disposing -consumer-report-information - rule-tells-how. -advice/business - center/guidance/security -check-reducing-risks-yourcomputer-systems