2018 Tax Changes. Tax Cuts and Jobs Act. STCA$H Fall Training 11/3/2018

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1 2018 Tax Changes Tax Cuts and Jobs Act STCA$H Fall Training 11/3/2018 1

2 Tax Reform on IRS.gov IRS.gov/taxreform IRS.gov/getready News Releases & Fact Sheets Tax Reform Tax Tips Frequently Asked Questions YouTube Videos Subscription Services for Updates 2

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4 New 1040 Refer to Handouts Official IRS Forms will be on 8 ½ x 11 paper Software companies may do something else It is expected that any paper returns will be mailed in an envelope Form 1040A and 1040EZ are gone Dependents will still be listed There are 6 new schedules 1-6 4

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7 Schedule 1 Refer to Handout 7

8 Schedule 2 Refer to Handout 8

9 Schedule 3 Refer to Handout 9

10 Schedule 4 Refer to Handout 10

11 Schedule 5 Refer to Handout 11

12 Schedule 6 Refer to Handout 12

13 Refer to Handout New? 13

14 1040 Page 1 - Dependents & Exemptions When calculating taxable income the value of an exemption is 0 New *Although the exemption amount is zero, the ability to claim an exemption may make taxpayers eligible for other tax benefits 14

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16 1040 (Page 2) Simple Scenario Preparer Input remains the same TaxSlayer Calculations behind the scenes Input INCOME o W-2 o Interest/Dividends o 1099R o Social Security 16

17 1040 Page 2 17

18 Changes to Child Tax Credit Amount increased to $2000 (including up to $1400 in Additional Child Tax Credit) per qualifying child New Children must have a SSN to qualify for CTC or ACTC New MAGI limits quadrupled - $110,000 in 2017; $400,000 in 2018 New 18

19 Credit for Other Dependents New credit: Up to $500 for each dependent who does not qualify for the child tax credit ITINs and ATINs ok for this credit Income test for dependent Non-refundable New 19

20 New Test * New - Children must have a SSN to qualify for Child Tax Credit or Additional Child Tax Credit 20

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22 Changes to Schedule A 1040 Page 2 Line 8 Refer to Handouts 23

23 Changes to Schedule A - Itemized Deductions Overall limit on itemized deductions suspended - Pease limitation Medical deduction for expenses > 7.5% this year - after 2018 limitation reverts to 10%. Deduction for state and local income, sales New and property taxes limited to $10,000 Now requires ADVANCED CERTIFICATION New 24

24 Changes to itemized deductions PMI deduction expired Deduction of home equity debt is disallowed as a mortgage interest deduction unless the $ was used to build, buy, or improve the New taxpayer s home Help is on the way! 25

25 Changes to itemized deductions Miscellaneous itemized deductions suspended items such as tax prep fees, uniforms, union dues, and unreimbursed employee business expenses such as, vehicle expenses, meals, entertainment and travel not allowed 26

26 Changes to itemized deductions Deduction for casualty and theft losses modified: A taxpayer may claim a personal casualty loss (subject to certain limitations) only if such loss was attributable to a disaster declared by the president Form 4684 is required and is OOS: New 27

27 Casualty Loss Example 28

28 Schedule C Changes Refer to Handouts The new law generally eliminated the deduction for any expenses related to activities generally considered entertainment, amusement or recreation New 50% of the cost of business meals still allowed if the taxpayer or an employee of the taxpayer is present 29

29 VITA Schedule C OOS Hobby income or not-for-profit activity Expenses over $25,000 Returns and allowances Cost of goods sold (inventory) Expenses for employees Business use of home Contract labor Casualty losses 30

30 VITA Schedule C OOS Vehicle expenses reported as actual expenses Depreciation or the election to expense business assets Rental or lease expenses vehicle leases of more than 30 days Accounting methods other than the cash method Net losses A No response that indicates the taxpayer does not meet the tests for material participation, or is uncertain about materially participating in a business Taxpayers who receive any credit card or similar payments that are not includible in income A Yes response indicating there is a requirement to file Form(s) 1099 Income from the manufacture, distribution, or trafficking of controlled substances (such as marijuana) 31

31 Schedule C situations that raise a red flag When preparing a tax return with selfemployment, watch for incorrect, incomplete, or inconsistent information, such as: Income reported in round numbers Cash businesses as the only source of income on a return claiming EIC Little or no expenses when expenses would be expected Little or no records for income and expenses Income that qualifies the taxpayer for the maximum EIC Self-employment without a Form

32 Schedule C Form 1099-K Income - Payment Card and Third Party Network Transaction: May be used to report income for taxpayers who use their automobiles for hire or ride share services such as Uber, Lyft, etc. Taxpayers may not receive the Form 1099-K if the amount is less than $600, but the amount received must still be reported 33

33 *New Qualified Business Deduction New deduction for pass-through businesses (Schedule C) Sole proprietors are categorized as passthrough businesses A sole proprietor may be able to deduct up to 20% of qualified business income (QBI) for each business Taxable income is not reduced below zero by the deduction 34

34 New Qualified Business Deduction Schedule C is not affected by the deduction Self-employment tax is not affected by the deduction The new deduction is on line 9 of 1040 The Qualified Business Deduction is in addition to the standard or itemized deduction We anticipate that TaxSlayer will automatically calculate the deduction 35

35 QBI Deduction Example 36

36 QBI Deduction - Example 37

37 Schedule D Changes TaxSlayer will do the work - FYI only 38

38 Schedule 1 Adjustments to Income Alimony change not effective until TY 2019 Recipient Alimony must still be claimed as income in 2018 Line 11 Payer Alimony still claimed as adjustment in 2018 Line 31a Educator expense adjustment line 23 Max amount for 2018 still $250 per TP * Amount will be indexed for inflation for future years. Moving expenses line 26 New Deduction for moving expenses suspended except for military 39

39 Schedule 1 Additional Income Line 21 Other Income: Student loan forgiveness New * Starting in 2018, forgiveness of student loan debt due to the student s death or total disability will not be taxable income to the student Gambling winnings Gambling losses still deductible if TP itemizes, do not net the winnings 40

40 Schedule 1 Adjustments to Income Line 29 - VITA Scope Change: Self-insured health insurance in scope - If a TP is self-employed and the business has a net profit then medical, health, and qualified longterm care insurance premiums for TP, spouse, and dependents may be deducted on Form 1040, Line 29 instead of Schedule A. 41

41 Refer to Handout Important 42

42 Schedule 3 Nonrefundable Credits 1098-T Changes New 43

43 Kiddie Tax Changes And Form 8615 now in scope "kiddie tax tax on unearned income of kids under 18 and full-time students younger than 24 New Refer to Handout 44

44 Form 8615 Kiddie Tax VITA Situations If a student receives education grants and unrestricted scholarships and either Amount of grants and scholarships exceeds tuition, fees and supplies OR To maximize QEE for education credits, student declares grant and/or scholarship as income Then tax preparer must look at all student s unearned income 45

45 Form 8615 Kiddie Tax VITA Situations If amount of all unearned income including grants and scholarships in excess of QEE or amount of grants and scholarship claimed as income is >$2100, Then Form 8615 must be filed by student 46

46 TaxSlayer & Kiddie Tax Refer to Handout 47

47 Form 8615 Kiddie Tax VITA Situations Kiddie tax is in addition to any regular income tax New New - Kiddie tax is calculated at Estate Tax rates 48

48 When is Form 8615 Required The kiddie tax can potentially apply until the year that a child turns age 24. More specifically, the kiddie tax applies when all four of the following requirements are met for the tax year in question: 1. The child doesn t file a joint return for the year. 2. One or both of the child s parents are alive at the end of the year. 3. The child s net unearned income for the year exceeds the threshold for that year, ($2,100 in 2018) and the child has positive taxable income after subtracting any applicable deductions, such as the standard deduction. If the unearned income threshold isn t exceeded, the kiddie tax doesn t apply. If the threshold is exceeded, only unearned income in excess of the threshold is hit with the kiddie tax. 49

49 When is Form 8615 Required 4. The child falls under one of the following age-related rules: (Basically is or can be claimed as a dependent) Rule 1. The child is 17 or younger at year end. Rule 2. The child is 18 at year end and doesn t have earned income that exceeds half of his or her support. (Support doesn t include amounts received as scholarships.) Rule 3. The child is age 19 to 23 at year end and 1) is a student, and 2) doesn t have earned income that exceeds half of his or her support. A child is considered to be a student if he or she attends school full-time for at least five months during the year. (Again, support doesn t include amounts received as scholarships.) 50

50 Kiddie Tax Age Examples Adam will be 17 on December 31, So, he falls under Rule 1. For 2018, he will be subject to the kiddie tax if the other three requirements are also met. Beth will be 19 on December 31, She doesn t have any earned income for the year, and she s a full-time student for the entire year. She falls under Rule 3. For 2018, she will be subject to the kiddie tax if the other three requirements are also met. Claire is 19 on December 31, She s not a student for 2018, so Claire is exempt from the kiddie tax for Dennis will be 21 on December 31, 2018, and he graduates from college in May He qualifies as a full-time student, because he s enrolled for the first five months of the year. Dennis couldn t find a job after graduation, so he doesn t provide over half of his own support for the year. Therefore, he s subject to the kiddie tax for 2018 under Rule 3, if the other three requirements are also met. Ellie will be 24 on December 31, Even though Ellie is still enrolled in college, she s exempt from the kiddie tax for 2018 and all subsequent years, because none of the age-related rules apply to her. 51

51 Kiddie Tax Calculation Example Adam (age 17) has $2,000 of earned income from delivering newspapers and $7,000 of unearned ordinary income. His standard deduction is $2,350 ($2,000 of earned income + $350). Adam s taxable income is $6,650 ($2,000 + $7,000 $2,350). Of that amount, $4,900 ($7,000 $2,100 unearned income threshold) is subject to the kiddie tax and therefore taxed at the rates for trusts and estates as follows. The first $2,550 is taxed at 10%, resulting in $255 of tax. The remaining $2,350 ($4,900 $2,550) is taxed at 24%, resulting in $564 of tax. The tax on Adam s $1,750 of taxable income that isn t subject to the kiddie tax is calculated using the regular rates for a single taxpayer. So the tax is $175 (10% x $1,750). So Adam s tax bill is $994 ($255 + $564 + $175). 52

52 ACA Update/Changes Penalty still in effect until TY 2019 For tax year 2018, the IRS will REJECT any return that does not account for all 12 months Coverage or Exemption or Penalty Refer to Handouts Hardship exemption can now be claimed on the tax return (no longer a Marketplace Exemption) 53

53 ACA Updates/Changes 54

54 ACA Hardship Exemptions 55

55 Most Important Points Many of the changes will be handled behind the scenes by TaxSlayer Standard Deduction Amounts Increased Deduction for Personal and Dependent Exemptions Suspended Tax Cuts and Jobs Act changes affected almost everyone who itemized previously 56

56 Most Important Points Children must have a Social Security Number to be claimed as qualifying child for the Child Tax Credit or Additional Child Tax Credit ACA penalty still in effect For the most part, data entry will remain the same, TaxSlayer will handle new computations 57

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