Tax Cuts & Jobs Act - Individual Tax Preparation

Transcription

1 Tax Cuts & Jobs Act - Individual Tax Preparation i

2 Copyright 2018 by 1040 Education LLC ALL RIGHTS RESERVED. NO PART OF THIS COURSE MAY BE REPRODUCED IN ANY FORM OR BY ANY MEANS WITHOUT THE WRITTEN PERMISSION OF THE COPYRIGHT HOLDER. All materials relating to this course are copyrighted by 1040 Education LLC. Purchase of a course includes a license for one person to use the course materials. Absent specific written permission from the copyright holder, it is not permissible to distribute files containing course materials or printed versions of course materials to individuals who have not purchased the course. It is also not permissible to make the course materials available to others over a computer network, Intranet, Internet, or any other storage, transmittal, or retrieval system. This document is designed to provide general information and is not a substitute for professional advice in specific situations. It is not intended to be, and should not be construed as, legal or accounting advice which should be provided only by professional advisers. ii

3 Contents Introduction to the Course... 1 Course Learning Objectives... 1 Chapter 1 TCJA Provisions Affecting Tax Preparation... 2 Introduction... 2 Chapter Learning Objectives... 2 New Individual and Capital Gains Tax Rates... 2 Standard Deduction Increased and Filing Requirements Changed... 3 Standard Deduction for Dependents... 4 Standard Deduction for Blind and Senior Taxpayers... 4 Standard Deduction Eligibility... 4 Federal Income Tax Return Filing Requirements... 4 Personal Exemption Temporarily Reduced to Zero... 5 Alimony... 5 Moving Expense Deduction & Reimbursement... 5 Moving Expenses in Military Relocations... 5 Itemized Deductions Schedule A... 6 Medical Expense AGI Threshold... 6 State and Local Tax Deductions... 6 Home Mortgage Interest Deduction... 6 Exception for Binding Contracts... 7 Indebtedness Refinancing... 7 Charitable Contributions % AGI Limit for Cash Contributions... 8 Deduction for Athletic Tickets... 8 Exception to Contemporaneous Written Acknowledgement... 8 Content and Timing of Contemporaneous Written Acknowledgement... 9 Casualty and Theft Loss Deduction... 9 Miscellaneous Itemized Deductions Subject to 2% of AGI Threshold... 9 Itemized Deductions Phase-Out Amounts... 9 Enhanced Child Tax Credit...10 Increase in Tax Credit Amount to $2, Child Tax Credit Phaseout and Refundable/Nonrefundable Amounts...10 Social Security Number Requirement...11 Partial Child Tax Credit for Other Than Qualifying Child with SSN...11 Alternative Minimum Tax (AMT)...11 Alternative Minimum Tax Exemption Amount Increased...11 Summary...12 Chapter Review...13 Chapter 2 TCJA Provisions Affecting Individuals Introduction...15 Chapter 2 Learning Objectives...15 Kiddie Tax Modifications...15 Section 529 (Qualified Savings Plan) Changes...15 ABLE Account Changes...16 Tax-Deferred Account...16 ABLE Account Distributions...16 ABLE Account Contributions...16 TCJA Changes to ABLE Accounts...16 Additional Designated Beneficiary Contributions Permitted...17 Saver s Credit...17 Discharge of Student Loan Indebtedness...17 Affordable Care Act (ACA) Provisions...18 Individual Requirement to Maintain Health Coverage...18 iii

4 Penalty for Failure to Maintain Health Coverage...18 Penalty Examples...19 Exemptions from Penalty for Failure to Maintain Health Coverage...20 Individual Mandate Penalty 2019 and Later...20 Roth Recharacterization...20 Changes in Employee Fringe Benefits...21 Real Property Depreciation...21 Estate and Gift Tax Exclusion...22 Summary...22 Chapter Review...23 Chapter 3 Business-Related TCJA Provisions Affecting Individual Taxes Introduction...24 Chapter Learning Objectives...24 Nature of the 20% Deduction for Qualified Business Income...24 Deduction Eligibility...24 Pass-Through Deduction for Qualified Trade or Business...25 Pass-Through Business...25 Qualified Trade or Business...26 Exception for Specified Service Trade or Business Based on Taxpayer s Income...26 Qualified Business Income...27 Exceptions to Qualified Business Income...28 Combined Qualified Business Income...28 Qualified REIT Dividend...28 Qualified Publicly Traded Partnership Income...28 Qualified Property...28 Depreciable Period...29 W-2 Wage Limitation...29 Determining W-2 Wages...29 Unmodified Box Method...29 Modified Box 1 Method...29 Tracking Wages Method...30 Calculating the Deduction...30 Schedule C Provisions...33 Entertainment Expenses...33 Food and Beverage Expenses...33 Section 179 Expense Limits % Expensing...34 Qualified Property...34 Luxury Auto Limits...35 Listed Property Updates...35 Net Operating Loss Changes...35 Summary...36 Chapter Review...37 Answers to Review Quizzes Chapter Chapter Chapter Glossary Index iv

5 Introduction to the Course The Tax Cuts and Jobs Act of 2017 (TCJA), signed into law during the closing days of 2017, will significantly affect tax planning and the income tax liability for many taxpayers. This course will examine the principal changes affecting individual taxpayers made by the TCJA. It examines the provisions of the TCJA with increased potential to affect the taxation of individuals and which are related to changes in: Individual and capital gains tax rates; Standard deduction and exclusions; Income and adjustments to income; Itemized deductions in Form 1040 Schedule A; Form 1040 Schedule C; Tax credits; Individual alternative minimum tax (AMT); Taxation of unearned income of minor children; Qualified tuition plans; ABLE accounts; Tax treatment of student loan indebtedness discharges; Net operating losses; and Affordable Care Act individual responsibility requirement. In addition, it will consider the business-related TCJA provisions affecting individual taxpayers, including the pass-through deduction for qualified trades or businesses under IRC 199A. Course Learning Objectives Upon completion of this course, you should be able to: Recognize and apply the 2018 individual income and capital gains tax rates; Identify the changes in deductions, exclusions, adjustments and tax credits resulting from the TCJA; Calculate the alternative minimum tax (AMT) and Kiddie tax; List the changes affecting Section 529 plans, ABLE accounts, discharge of student loan indebtedness, accounting for net operating losses and the individual responsibility requirement under the Affordable Care Act; and Calculate the pass-through deduction available under IRC 199A. 1

6 Chapter 1 TCJA Provisions Affecting Tax Preparation Introduction In the closing days of 2017 Congress passed and the President signed the first major tax reform legislation in 30 years, known as the Tax Cuts and Jobs Act of 2017 (TCJA). The majority of the changes brought about by passage of the legislation relating to individual taxpayers are temporary in nature, generally apply beginning in 2018 and expire for tax years after December 31, Chapter 1 principally addresses the provisions of the new law that relate to the preparation of individual income tax returns. Chapter Learning Objectives When you have completed chapter 1, you should be able to: Recognize the TCJA s effect on the individual income and capital gains tax rates; List the changes in standard deductions, filing requirements and exemptions resulting from passage of the Tax Cuts and Jobs Act; Describe the TCJA s impact on the adjustments to income for alimony and taxpayer moving expenses; Identify the changes affecting the itemized deductions on Schedule A; and Understand the provisions of the enhanced child tax credit. New Individual and Capital Gains Tax Rates The TCJA, 11001, maintains the current seven individual tax brackets but generally reduces the applicable tax rates for tax years 2018 through A comparison of the individual tax brackets that would have been in effect for 2018 prior to passage of the TCJA with the brackets effective for 2018 income under the TCJA shows the following: TCJA Income Tax Brackets 2018 TCJA Tax Bracket Bracket for Income in Excess of 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 2

7 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 Maximum Rate Joint Return and Surviving Spouse Head of Household Married Filing Separately Single Estates & Trusts 0% Less than $77,200 Less than $51,700 Less than $38,600 Less than $38,600 Less than $2,600 15% $77,200 to less than $479,000 $51,700 to less than $452,400 $38,600 to less than $239,500 $38,600 to less than $425,800 $2,600 to less than $12,700 20% $479,000 $452,400 $239,500 $425,800 $12,700 Under tax law before passage of the TCJA, the applicable capital gains tax rates were tied to the taxpayer s tax bracket. Accordingly, taxpayers in the two lowest tax brackets those previously in the 10% and 15% brackets, in other words paid no capital gains taxes. Taxpayers whose tax brackets exceeded 15% but were lower than the 39.5% highest tax bracket those formerly in a 25%, 28%, 33% or 35% tax bracket paid tax on their capital gains at a 15% rate. Finally, a taxpayer formerly in the 39.5% tax bracket would have paid tax on capital gains at a 20% rate. Prior Capital Gains/Qualified Dividend Tax Rates Based on Taxable Income & Filing Status Applicable Maximum Rate Joint Return and Surviving Spouse Head of Household Married Filing Separately Single Estates & Trusts 0% Less than $77,400 Less than $51,850 Less than $38,700 Less than $38,700 Less than $2,600 15% $77,400 to less than $480,000 $51,850 to less than $453,350 $38,700 to less than $240,025 $38,700 to less than $426,700 $2,600 to less than $12,700 20% $480,000 $453,350 $240,025 $426,700 $12,700 Although these preferential capital gains rates are no longer automatically adjusted for inflation as the income at which the income tax brackets apply, they are subject to an annual cost of living adjustment based on the Chained Consumer Price Index for all Urban Consumers. Standard Deduction Increased and Filing Requirements Changed The standard deductions that would have applied to 2018 income, absent the passage of the TCJA, were: $13,000 for married couples whose filing status is married filing jointly and surviving spouses; $6,500 for singles and married couples whose filing status is married filing separately ; and $9,550 for taxpayers whose filing status is head of household. The TCJA, 11021, has increased the standard deduction for 2018 through 2025 and is adjusted for inflation for years after Under the new law, standard deductions are: 3

8 $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 The standard deduction for dependents has generally remained the same under TCJA as under prior law. An individual who can be claimed as a dependent is 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 Similarly, the increased standard deduction applicable to elderly and/or blind taxpayers remained as it would have been under the law in effect prior to passage of the TCJA. 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 i.e. 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 There was no change concerning eligibility to take the standard deduction. 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. Note: The ability of a taxpayer to qualify for a pass-through deduction under 199A is not affected by the taxpayer s decision to itemize deductions or take the standard deduction. Federal Income Tax Return 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(s). 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. 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 2018 Gross Income 4

9 Filing Threshold 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 $19,600 Personal Exemption Temporarily Reduced to Zero Personal exemptions are temporarily reduced to zero under TCJA, 11041, for taxable years beginning after December 31, 2017, and before January 1, Alimony Under the tax code before TCJA passage, alimony (but not child support) is deductible by the payer and included in the income of the recipient for tax purposes. Under the TCJA, that tax treatment continues only for alimony payments made pursuant to a divorce or separation agreement entered into on or before December 31, Thus, alimony payments made in 2018 are deductible to the payer and includible in the recipient s income. However, under TCJA, 11051, alimony payments will no longer be tax-deductible to the payer or includible in the income of the recipient if made under: a) A divorce or separation agreement entered into after December 31, 2018; or b) A divorce or separation agreement entered into on or before December 31, 2018 but modified after that date if the modified agreement specifically provides that the provisions of the Tax Cuts and Jobs Act of 2017 will apply. Alimony payments made under a divorce or separation agreement entered into on or before December 31, 2018 but paid after that date with the exception of such payments made under a modified agreement described in b) above will continue to be tax-deductible to the payer and includible in the income of the recipient. Moving Expense Deduction & Reimbursement Many taxpayers change their residence each year, and a substantial percentage of those taxpayer relocations involve new jobs. Prior tax law permitted a taxpayer to deduct moving expenses provided the new job location was at least 50 miles farther from the taxpayer s former home than the former main job location or, if the taxpayer had no former principal place of work, the new job location was at least 50 miles from the taxpayer s former home. However, under the TCJA, and 11049, both the taxpayer s moving expense deduction and the exclusion of an employer s reimbursement or payment of the taxpayer s moving expenses have been suspended except for military relocation. Accordingly, any non-military moving expense reimbursement made by an employer is taxable as income to the employee. Moving Expenses in Military Relocations In the case of a military relocation, the taxpayer s move must be pursuant to a military order and involve a permanent change of station. In such a case, no paid or incurred moving and storage expenses: Furnished in kind, or For which reimbursement or allowance is provided to the service member, spouse or dependents are includible in gross income or reported. In addition, if the moving expenses paid or incurred in connection with a military relocation are furnished or reimbursed (or an allowance is provided) to the service member s spouse and dependents to move: To a location other than the one to which the service member moves, or From a location other than the one from which the service member moves 5

10 such expenses are likewise neither includible in gross income nor reported. Itemized Deductions Schedule A The TCJA has affected various Schedule A itemized deductions. The affected Schedule A deductions are those for: Medical expenses; State and local taxes; Home mortgage interest; Charitable contributions; Casualty and theft losses; and Miscellaneous itemized deductions subject to 2% of AGI. In addition, the new tax law has affected the overall limitation on itemized deductions. Let s consider each of these changes. Medical Expense AGI Threshold The medical and dental expense deduction is subject to an AGI threshold, and only unreimbursed medical and dental expenses that, in total, exceed the threshold may be deducted. In 2013, the AGI threshold applicable to deductible medical and dental expenses was increased from 7.5% of AGI a level at which it had been since 1986 to 10% of AGI. The increase in the AGI threshold from 7.5% to 10% was waived for taxpayers age 65 or older until January 1, Effective January 1, 2017, the 10% AGI threshold applicable to unreimbursed medical and dental expenses was scheduled to apply to all taxpayers. However, the TCJA, 11027, reduced the applicable threshold for the deduction of unreimbursed medical and dental expenses to 7.5% of AGI for the years 2017 and Beginning in 2019, the applicable AGI threshold above which a taxpayer may deduct unreimbursed medical and dental expenses will be 10% for all taxpayers regardless of age. State and Local Tax Deductions State and local taxes paid by an itemizing taxpayer have generally been a deductible item on the taxpayer s federal income tax return without limit. The TCJA, 11042, limits the federal income tax deduction for state and local taxes to $10,000 ($5,000 for married taxpayers filing separately) beginning in Since charitable contributions made by the taxpayer: Are generally deductible within certain limits, and Money and property given to a federal, state or local government if solely for public purposes is considered a charitable contribution tax planners and others have proposed that a taxpayer whose state and local taxes exceed $10,000 (or $5,000, as appropriate) in the aggregate make a charitable contribution to a state or local government for the amount of such taxes exceeding the TCJA limit and receive a state or local tax credit in return. The IRS, in an effort to deter such workarounds, has issued proposed regulations in which the deduction for the charitable contribution made in lieu of the state and local taxes would be deemed a quid pro quo 1 for the charitable contribution and have proposed that the charitable deduction must generally be reduced by the amount of the state or local tax credit received or expected to be received. Home Mortgage Interest Deduction Under prior tax law, the home mortgage interest deduction was limited to home mortgage interest paid on mortgage debt debt secured by a taxpayer s residence falling into three categories: 1. Mortgages taken out before October 13, 1987, called grandfathered debt ; 1 See proposed regulations, page 9. 6

11 2. Mortgages taken out by the taxpayer (or spouse if married filing a joint return) after October 13, 1987 to buy, build or improve the taxpayer s home, i.e. acquisition debt, but only if the total of such mortgages plus any grandfathered debt was $1 million or less ($500,000 or less if married filing separately) throughout the year; and 3. Mortgages taken out by the taxpayer (or spouse if married filing a joint return) after October 13, 1987 that were home equity debt, i.e. any indebtedness (other than acquisition indebtedness) secured by a qualified residence, but only if the total of such mortgages was $100,000 or less ($50,000 or less if married filing separately) and totaled no more than the fair market value of the taxpayer s home reduced by 1 and 2 above. The dollar limits for mortgages in the second and third categories apply to the combined mortgages on the taxpayer s main home and any second home. The TCJA made the following changes to the existing home mortgage interest deduction for taxable years 2018 through 2025: Interest paid on home equity indebtedness home equity loans and lines of credit, in other words incurred after December 15, 2017 is not tax-deductible unless used to buy, build or substantially improve the taxpayer s home that secures the loan; Interest paid on acquisition debt incurred after December 15, 2017, less any acquisition debt incurred on or before December 15, 2017, is limited to interest paid on total acquisition indebtedness but only if the total of such mortgages is $750,000 or less ($375,000 or less if married filing separately); and Interest paid on acquisition debt incurred on or before December 15, 2017 is limited to interest paid on acquisition indebtedness of $1,000,000 or less ($500,000 or less if married filing separately). An exception to the new mortgage rules may apply to written binding contracts to purchase a residence entered into before December 15, 2017, as discussed in Exception for Binding Contracts below. Exception for Binding Contracts A taxpayer could enter into a written binding contract to buy a principal residence before December 15, 2017 to close on the property before January 1, 2018 but not purchase the residence until after December 31, In such a case, if the taxpayer purchases the residence before April 1, 2018, the acquisition debt for purposes of the mortgage interest deduction will be deemed to have been incurred before December 15, Accordingly, the maximum tax deduction would be limited to interest paid on acquisition indebtedness of $1,000,000 or less ($500,000 or less if married filing separately) rather than the reduced amounts under the TCJA. Indebtedness Refinancing The tax treatment of refinanced existing mortgage debt is treated, for purposes of the applicable dollar limits, as incurred on the date the original indebtedness was incurred, but only to the extent the amount of the indebtedness resulting from the refinancing does not exceed the amount of the refinanced indebtedness. Charitable Contributions Charitable contributions are contributions made in cash or property to, or for the use of, churches and governments and to other organizations that have applied to the IRS and been approved to become qualified organizations. A contribution made to an individual, regardless of how needy the individual, is not a charitable contribution for which a tax deduction may be taken. The maximum amount of charitable contribution a taxpayer is permitted to deduct in any year may be limited by the taxpayer s contribution base in most cases the contribution base is an amount equal to the taxpayer s adjusted gross income and further limited depending on the type of property contributed. However, any charitable contribution exceeding the applicable tax deduction limit may be carried over to the following five years. The tax code generally applies three limits applicable to the permitted tax deduction of charitable contributions. Those limits are: A 50% limit that normally applies to most qualified organizations, such as contributions to 7

12 o churches, o educational organizations with a regular faculty and curriculum, o organizations whose principal purpose is providing medical or hospital care, medical education or medical research such as hospitals or medical research organizations (if the organization is a medical research organization that is committed to spending such contributions for research before January 1 of the fifth calendar year beginning after the date such contribution is made), and o the United States or any state, the District of Columbia, a U.S. possession, a political subdivision of a state or U.S. possession, or an Indian tribal government; A 30% limit that applies to contributions o for the use of any qualified organization; o of capital gain property contributed to 50% limit organizations if the deduction is figured on the fair market value without reduction for appreciation, and o to all qualified organizations other than 50% limit organizations, such as veterans organizations, fraternal societies, nonprofit cemeteries, and certain private nonoperating foundations; and A 20% limit that applies to all contributions of capital gain property to or for the use of qualified organizations that are not 50% limit organizations. 60% AGI Limit for Cash Contributions The TCJA, 11023, increases the limit on a taxpayer s deductible charitable cash contributions from 50% under prior tax law to 60% of the taxpayer s contribution base for qualified organizations to which the 50% limit normally applies. The increased limitation for cash contributions applies to contributions made in any taxable year beginning after December 31, 2017 and before January 1, Deduction for Athletic Tickets Colleges and universities, as a means of encouraging donors to make contributions, sometimes offer donors special perquisites, such as a guaranteed right to purchase football, basketball or other sports tickets to see the college team play. Under prior tax law, if a taxpayer made a payment to, or for the benefit of, a college or university and, as a result of making the payment, received the right to buy tickets to an athletic event in the athletic stadium of the college or university, the taxpayer was able to deduct 80% of the payment as a charitable contribution. The TCJA has changed the deduction by eliminating that provision. Under the TCJA, 13704, no deduction is permitted for a payment made after December 31, 2017 to an institution of higher education that entitles the donor to receive the right either directly or indirectly to purchase tickets for seating at an athletic event at the institution s athletic stadium. However, if a portion of a payment is for the purchase of such tickets, the part of the payment that is for the tickets and the remainder of the payment should be treated as separate amounts: a portion not tax-deductible and a portion possibly tax-deductible. Exception to Contemporaneous Written Acknowledgement Donors making charitable gifts of $250 or more are required to obtain a contemporaneous written acknowledgment of the gift from the charitable organization in order to substantiate the gift for tax purposes. Under prior law, an alternative form of charitable gift substantiation permitted the charitable organization to file a document with the IRS that contained detailed information concerning the donor and the donor s gift rather than requiring the donor to obtain a contemporaneous written acknowledgement of the gift. The TCJA, in 13705, eliminates the exception to a contemporaneous written acknowledgment of a donor s gift, effective for gifts made after December 31, (Note: The effective date of the elimination of the exception to a contemporaneous written acknowledgment is retroactive to gifts made on and after 2016.) 8

13 Content and Timing of Contemporaneous Written Acknowledgement In order to meet the requirements of the TCJA with respect to a contemporaneous written acknowledgment of a charitable gift, the acknowledgment should contain the following information: The amount of cash and a description of any property other than cash contributed; Whether the organization receiving the gift provided any goods or services in return for the gift; and A description and a good-faith estimate of the value of any goods or services given by the donor or, if the goods and services received by the donor consist solely of intangible religious benefits, a statement to that effect. A written acknowledgment of a charitable gift is considered contemporaneous only if it is obtained by the donor on or before the earlier of: The date the taxpayer files a tax return for the taxable year in which the contribution was made, or The due date, including extensions, for filing the tax return for the taxable year in which the contribution was made. Casualty and Theft Loss Deduction Taxpayers normally have been able to deduct some or all of the losses they incur as a result of various casualties fires, storms, shipwrecks, etc. and thefts. Under prior tax law, the tax deduction for a personal casualty or theft loss was limited to such losses but only to the extent that: The amount of each separate casualty or theft loss was more than $100, and The total amount of all losses during the year, reduced by $100, was more than 10% of the taxpayer s adjusted gross income. The tax treatment of personal casualty losses and thefts is changed under the TCJA. Pursuant to the TCJA, 11044, the itemized deduction for personal casualty and theft losses is temporarily limited in tax years 2018 through 2025 solely to losses attributable to federally-declared disasters. In addition, casualty loss rules are revised for net disaster losses occurring in 2016 and Under the revision, the limitation applicable to each casualty is increased from the previous $100 to $500 for an individual who has a net disaster loss for tax years beginning in 2016 or However, the 10% of AGI limitation for such taxpayers is waived. A federally declared disaster means any disaster that is subsequently determined by the president of the United States to warrant assistance by the federal government under the Robert T Stafford Disaster Relief and Emergency Assistance Act. Miscellaneous Itemized Deductions Subject to 2% of AGI Threshold Taxpayers who itemize their deductions normally have been able to deduct certain expenses as miscellaneous itemized deductions on schedule A (Form 1040) to the extent that, in the aggregate, they exceed 2% of the taxpayer s AGI. Such taxpayer expenses include: Unreimbursed employee expenses; Tax preparation fees; and Certain other expenses. Under the TCJA, 11045, these miscellaneous itemized deductions subject to the 2% of AGI floor are suspended for expenses incurred after December 31, 2017 through Itemized Deductions Phase-Out Amounts Prior tax law provides for an overall limitation on certain itemized deductions applicable to higherincome individuals whose adjusted gross income (AGI) exceeds specified limits based on the taxpayer s filing status. The specified limits are subject to annual adjustment for inflation. The TCJA, 11046, suspended the overall limitation on itemized deductions for tax years beginning after December 31, 2017 through December 31, Accordingly, itemized deductions are not reduced for higher-income taxpayers. 9

14 Enhanced Child Tax Credit The child tax credit is a nonrefundable credit that may reduce the taxpayer s tax for each of the taxpayer s qualifying children. Since the child tax credit is a nonrefundable tax credit, it is available in full only to taxpayers whose income tax liability is at least as great as the credit. The additional child tax credit is a credit for certain individuals who get less than the full amount of the child tax credit. Unlike the child tax credit, the additional child tax credit is a refundable tax credit. The phaseout of the Child Tax Credit under which the credit is reduced by $50 for each $1,000 (or fraction) by which the taxpayer s MAGI exceeds the threshold amount is changed under the TCJA by: Increasing the threshold for taxpayers filing MFJ from $110,000 to $400,000; and Increasing the threshold for taxpayers filing as other than MFJ from $75,000 (unmarried) or $55,000 (MFS) to $200,000. In addition to having a tax liability, a taxpayer must also have a qualifying child or children to be eligible for a Child Tax Credit. A qualifying child, for purposes of the Child Tax Credit, is a child who: Is the taxpayer s son, daughter, stepchild, foster child, brother, sister, stepbrother, stepsister, or a descendent of any of them; Was under age 17 at the end of the tax year; Did not provide more than one half of his or her own support during the year; Lived with the taxpayer for more than half of the year; Is claimed as a dependent on the taxpayer s return; Does not file a joint return for the year, or files it only as a claim for refund; and Was a U.S. citizen, a U.S. national, or a resident of the United States. Increase in Tax Credit Amount to $2,000 Various changes have been made by the TCJA, 11022, to the Child Tax Credit for taxable years beginning after December 31, 2017 and before January 1, The changes to the Child Tax Credit include: An increase in the credit; An increase in the refundable portion of the credit, and An increase in the taxpayer s MAGI at which the credit is reduced. The Child Tax Credit is increased from $1,000 to $2,000. Child Tax Credit Phaseout and Refundable/Nonrefundable Amounts Although the maximum amount of child tax credit a taxpayer may claim for each qualifying child is increased under the TCJA from $1,000 to $2,000, that amount may be reduced if: The amount of the tax liability shown on the taxpayer s Form 1040 or Form 1040A is less than the credit; or The taxpayer s modified adjusted gross income 2 is more than o $400,000 if married filing jointly, or o $200,000 if filing as other than married filing jointly. If a child tax credit is reduced because of the taxpayer s high MAGI or tax liability that is lower than the credit to which the taxpayer would otherwise be eligible, the additional child tax credit may be payable. The additional child tax credit is a credit for certain individuals who get less than the full amount of the child tax credit. Unlike the child tax credit, the additional child tax credit is a refundable tax credit and is available for up to $1, For purposes of the child tax credit, the taxpayer s modified adjusted gross income is equal to the sum of the taxpayer s AGI plus any amount: Excluded from income because of the exclusion of income from Puerto Rico; On line 45 or line 50 of Form 2555, Foreign Earned Income; On line 18 of Form 2555 EZ, Foreign Earned Income Exclusion; and On line 15 of Form 4563, Exclusion of Income for Bona Fide Residents of American Samoa. 10

15 Social Security Number Requirement Under prior tax law, if a qualifying child had an Individual Taxpayer Identification Number (ITIN) rather than a Social Security Number, the taxpayer claiming the Child Tax Credit was required to complete Schedule 8812, Part I and attach it to Form 1040 or 1040A. (ITINs are issued by the IRS to individuals who don t have, and are ineligible for, a Social Security number.) The TCJA disallowed the use of ITINs for the purpose of qualifying for the Child Tax Credit. Under the TCJA, no Child Tax Credit is allowed to a taxpayer with respect to any qualifying child unless the taxpayer includes on the tax return the Social Security number of that child, issued: Before the due date of the taxpayer s tax return; To a U.S. citizen, or To an alien at the time of U.S. admission for permanent residence or under a law permitting engagement in U.S. employment, or To an alien at the time of a change in status permitting engagement in U.S. employment. However, a qualifying child for whom no child tax credit is allowed solely because of the taxpayer s failure to include a Social Security number may qualify for a partial child tax credit discussed next. 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. Alternative Minimum Tax (AMT) Imposition of an alternative minimum tax was designed to ensure that at least a minimum amount of tax is paid by higher-income taxpayers who enjoy significant tax savings through the use of certain tax deductions, exemptions, losses and credits. Absent the alternative minimum tax, such taxpayers could conceivably avoid federal income tax liability completely despite their high income level. After various tax-preference items are added back to the taxpayer s income, the applicable alternative minimum taxable income (AMTI) exemption, discussed below, is subtracted. Alternative Minimum Tax Exemption Amount Increased The tax code provides for an AMTI exemption for purposes of determining the alternative minimum tax amount. The amount of the AMTI exemption varies according to the taxpayer's filing status and the tax year. The applicable AMTI exemption amounts 3 for 2018, as increased by the TCJA 12003, are as follows: Filing Status Threshold for Phaseout of Exemption Amount Alternative Minimum Taxable Income Exemption Single or Head of Household $500,000 $70,300 Married Filing Jointly & Qualifying Widow(er) $1,000,000 $109,400 Married Filing Separately $500,000 $54,700 Estates and Trusts $500,000 $24,600 The AMTI exemption amount is reduced (but not below zero) by 25 percent of the amount by which the taxpayer s alternative minimum taxable income exceeds: $1,000,000 for taxpayers whose filing status is married filing jointly or qualifying widow(er) ; and 3 AMTI exemption amounts are indexed for inflation. 11

16 Summary $500,000 for taxpayers whose filing status is single, head of household, married filing separately and for trusts and estates. The Tax Cuts and Jobs Act of 2017 (TCJA) legislation generally effective for years beginning after 12/31/17 and before 1/1/26 made changes to both individual and corporate taxation. The more significant tax changes impacting individual tax preparation and planning made by the Act include: Maintaining the 7 marginal tax rates but revising individual tax rates downward; Eliminating personal exemptions; Increasing the AMT exemption and the income at which the AMT exemption phaseout occurs; Substantially increasing the standard deduction; Reducing the AGI limitation for deducting unreimbursed medical expenses; Limiting the deduction for state and local taxes; Reducing the mortgage debt on which mortgage interest is deductible; Eliminating the equity debt interest deduction unless used to buy, build or improve a taxpayer s residence; Increasing the limit on the deductibility of charitable cash contributions; Eliminating miscellaneous itemized deductions subject to the 2% of AGI limit; Eliminating the moving expense deduction/exclusion for other than military relocations; Eliminating the deduction for alimony payments made and the inclusion in income of alimony payments received; Eliminating the phaseout of itemized deductions for higher income taxpayers; and Increasing the Child Tax Credit and the refundable portion. Thumbnail Summary of Tax Cuts and Jobs Act Changes Provision Change Effective Tax rate brackets Individual tax brackets revised downward 2018 Personal exemptions Eliminated 2018 AMT exemption Standard deduction Medical expense deduction State and local tax deduction Mortgage interest deduction Home equity debt interest deduction Exemption amounts increased to: $109,400 for MFJ taxpayers $70,300 for single and HOH taxpayers Exemption phaseout increased to: $1 million for MFJ taxpayers $500,000 for single and HOH taxpayers Standard deduction increased to: $24,000 for MFJ taxpayers $18,000 for HOH taxpayers $12,000 for single taxpayers Medical expense deduction permitted for unreimbursed medical expenses over 7.5% AGI State and local tax, sales tax and property tax deductions eliminated in excess of: $10,000 $5,000 (MFS) Mortgage interest deductible only on debt not exceeding $750,000 Eliminated unless used to buy, build or improve taxpayer s residence & 2018 only 2018 Debt incurred after 12/15/

17 Charitable deduction Cash contribution limit increased to 60% of AGI for public charities and certain private foundations 2018 Miscellaneous itemized deductions subject to 2% of AGI Moving expense deduction/exclusion Eliminated 2018 Eliminated for other than military relocations 2018 Alimony Deduction eliminated and no longer includible in recipient income Agreements after 12/31/18 Itemized deduction phaseout Phaseout for high income taxpayers eliminated 2018 Child Tax Credit Credit increased to $2,000, $1,400 refundable. Phaseout increased to: $400,000 for MFJ taxpayers $200,000 taxpayers other than MFJ 2018 Chapter Review 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, If Harriet, age 45, itemized her deductions for 2018, had an AGI of $60,000 and total unreimbursed medical expenses of $10,000, what part of her medical expenses, if any, can she deduct? A. $0 B. $4,000 C. $5,500 D. $10, John incurred $1,000 of unreimbursed business expenses on behalf of his employer in If his AGI in 2018 is $60,000, how much of the business expenses can he deduct? A. $0 B. $200 C. $500 D. $1,000 13

18 5. As a single man Arthur s alternative minimum taxable income exemption in 2018 is $70,300 if his income does not exceed $500,000. What is his AMTI exemption amount if his alternative taxable income is $600,000? A. $0 B. $25,000 C. $45,300 D. $70,300 14

19 Chapter 2 TCJA Provisions Affecting Individuals Introduction The Tax Cuts and Jobs Act of 2017 changed a number of provisions in the existing tax code. This chapter will consider the changes made by the TCJA to the Kiddie Tax and Qualified Tuition Plans. It will also look at the elimination of the tax penalty imposed under the ACA for individuals who fail to maintain health coverage, the TCJA s changes to certain employee fringe benefits and the rules applicable to the depreciation of real property. Chapter 2 Learning Objectives When you have completed the chapter 2 text addressing the principal individual provisions of the Tax Cuts and Jobs Act, you should be able to: Describe the Kiddie Tax modifications and the broadening of 529 plan distributions; List the changes affecting the discharge of student loan indebtedness and net operating losses; Describe the TCJA 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. Kiddie Tax Modifications The kiddie tax was introduced as part of the Tax Reform Act of 1986 and was intended to discourage parents from placing investments in their children s names rather than in their own in hopes of reducing their income taxes. Under the kiddie tax provisions in the prior law, all of the child s unearned income exceeding the applicable threshold was taxed in the parent s marginal tax rate, i.e. the highest tax rate applied to the last dollar the parents earned. No preferential tax rate for capital gains or qualified dividends applied to the kiddie tax. That is changed beginning for For taxable years beginning after December 31, 2017 and before January 1, 2026, the TCJA, in 11001, differentiates between long-term capital gain and other types of earned income and imposes the following tax rules on children s earned and unearned income to which the kiddie tax rules apply: Taxable income attributable to the child s earned income is taxed in accordance with unmarried taxpayers rates and brackets; The tax rate on taxable unearned income attributable to the child mirrors the tax rates applicable to estates and trusts and, for the 2018 taxable year the following rates apply o For taxable income attributable to the child s unearned income other than long-term capital gain or qualified dividends is 10% on income up to $2,550, 24% on income exceeding $2,550 up to $9,150, 35% on income exceeding $9,150 up to $12,500, and 37% on income over $12,500; o For taxable income attributable to the child s unearned income from long-term capital gain and qualified dividends is 0% on the sum of earned taxable income plus capital gain and qualified dividend income up to $2,600, 15% on the sum of earned taxable income plus capital gain and qualified dividend income up to $12,700, and 20% on the sum of earned taxable income plus capital gain and qualified dividend income in excess of $12,700. Section 529 (Qualified Savings Plan) Changes Before passage of the TCJA, an eligible educational institution at which a distribution for expenses of enrollment or attendance would be considered qualified education expenses under a 529 Tuition Savings Plan included an educational institution eligible to participate in a student aid program administered by the U.S. Department of Education such as a: College; 15

20 University; Vocational school; or Other post-secondary educational institution. However, elementary and secondary school expenses were not considered qualified education expenses. The TCJA, 11032, broadens the definition of qualified education expenses by authorizing an annual qualified distribution of contributions made after 12/31/17 (and income on such contributions) of up to $10,000 from all of a taxpayer s 529 plans for elementary or secondary school tuition. Such schools may be: Public; Private; or Religious. ABLE Account Changes In 2014, legislation called the Achieving a Better Life Experience Act of 2014 better known as the ABLE Act became law. The ABLE Act permits individuals with significant disabilities who are younger than age 26 at the time of onset of disability and who are receiving benefits under SSI and/or SSDI to establish a tax-deferred ABLE account to provide tax-free distributions to meet the additional expenses associated with living with a disability. Tax-Deferred Account An ABLE account is a tax-advantaged account to which a designated beneficiary (who is also the account owner) and others may make after-tax cash contributions not exceeding applicable limits for the purpose of meeting the designated beneficiary s qualified disability expenses. Earnings on the amount contributed to the ABLE account are tax-deferred. A designated beneficiary is limited to only one ABLE account. ABLE Account Distributions If a designated beneficiary takes a distribution from an ABLE account for purposes of meeting qualified disability expenses, the distribution not exceeding those expenses is tax-free. Any distribution in excess of qualified disability expenses is taxable as ordinary income and subject to a tax penalty equal to 10% of the amount of such distribution includable in income. A qualified disability expense is any expense related to the designated beneficiary as a result of living a life with disabilities, and includes expenses for: Education, Housing, Transportation, Employment training and support, Assistive technology, Personal support services, Healthcare, Financial management and administrative services, and Other expenses that help improve health, independence and/or quality of life. ABLE Account Contributions Cash contributions to an ABLE account may be made by the designated beneficiary and others. The maximum amount of annual contribution to the account, in total, is generally limited to the annual gift tax exclusion amount ($14,000 in 2017; $15,000 in 2018). TCJA Changes to ABLE Accounts The TCJA, 11024, made three important changes to ABLE accounts: 1. Additional annual contributions are permitted; 2. A designated beneficiary is permitted to claim the saver s credit for contributions made to the account; and 3. Rollovers from 529 Tuition Savings Plans to ABLE accounts are permitted. Let s briefly examine the nature of these changes. 16