In December 2017, the biggest tax package since the 1986 Tax Reform Act was passed by Congress and signed into law. Originally touted as an attempt to simplify our very complicated tax code, the final result is at least as complicated as its predecessor.
A great example is alimony. Alimony paid is deductible by the payer and taxable to the recipient. Until 2019, that is. Any alimony agreements enacted after that date will be non-deductible by the payer and not taxable to the recipient. So, don’t count on many divorces being finalized before 2019. The reason for this change is said to be in order to come within compliance of a court case that is about 100 years old! Go figure. So, tax preparers have to monitor when you were divorced and make sure it wasn’t modified after 2018.
Another big deal is the mortgage interest deduction on personal residences. Interest on pre-existing mortgages, including those incurred before December 15, 2017, is deductible on loans up to $1,000,000 (assuming the funds were used to acquire or improve the residence). Any funds borrowed as home equity loans and not used for the primary residence acquisition or improvement will not be deductible unless it qualifies in some other manner, and there aren’t many other ways to deduct it. Refinancing existing home mortgages, even if over the $750,000 limit, may be okay. So tax preparers have to monitor refinancing of your home. Great.
The new law does make some attempts at simplification. It eliminates the deduction for hiring someone to prepare your taxes. It also eliminates the deduction for hiring an attorney to draw up your will and trust documents. Ditto for deducting safe deposit boxes, the cost of investment fees (wrap investment fees), unreimbursed miscellaneous employee expenses, investment publications and a lot of other items falling under the miscellaneous deductions subject to the 2 percent limitation.
You can stop worrying about real estate taxes, personal property taxes and state income taxes, once you hit $10,000, because any excess is not deductible as itemized deductions anymore either.
On a bright note, if you have itemized deductions (those still allowed) that are less than $12,000 for individuals, or $24,000 for married filing joint, you won’t have to worry about itemizing anymore. The standard deduction has been increased to those levels.
Please note that some of the deductions—such as tax preparation—may be deductible in whole or in part in other manners, such as allocating part of the cost of tax preparation to rental properties or businesses on your return. But it is a case-by-case situation.
No more personal exemptions. In prior 2017, you can claim a deduction for dependents in the amount of $4,050 per person—you, your spouse, your kids and other relatives who depend upon you for support, such as your retired parents. In 2018, there is no dependents’ deduction. Not for you, your spouse or your kids. Not even one for your folks if you are able to treat them as dependents. Instead, you get a $2,000 child tax credit for each kid under 17. Good news, since the old credit was $1,000 per kid. You get a tax credit of $500 for other dependents. The child tax credit is refundable up to $1,400, but the $500 dependent credit is not refundable.
More good news! No more kiddie tax. That was a tax that was imposed on passive income earned by kids. They were taxed at their parent’s tax rates. It was meant to keep them from sheltering passive income, interest, dividends and other income from the parent’s tax rates. Now you don’t have to worry about it. BUT you have to calculate the child’s tax based on the trust income tax brackets.
FYI, a trust hits the top tax bracket of 37 percent at taxable income of $12,500. Ouch!
So I guess we can cross simplification from our list of things that the tax bill accomplished. It is going to be a very interesting exercise to determine who gets hit and who benefits and how to mitigate the impact. If there was ever a time you needed a CPA to assist you in your tax planning, now is that time. You just may not be able to deduct it anymore!