By Sheryl J. Seiden, Esq.[1]
For the first time in three decades, Congress passed the Tax Cut and Jobs Act (“TCJA”) bill which has changed the landscape of the tax laws for the future. This summary is intended to provide some insight into how these changes will affect the individual taxpayer.
1. The Tax Rates: The good news is that the tax rates and the threshold income for which the tax rates apply will generally change for the better. The tax rates have been generally lowered and the income threshold for jumping to the next tax bracket has increased. The highest new tax bracket is 37% vs. 39.6% and this new tax rate applies to income over $600,000 for married filing jointly taxpayers whereas the old higher rate applied to income over $470,700, and over $500,000 income for single tax filings whereas the old higher rate applied to income over $418,400. The taxpayers in the highest tax bracket are not the only taxpayers who will benefit from a lower tax rate. Most of the tax brackets have decreased and all of the income thresholds for moving to the next tax bracket have increased as follows:
In addition to lower the tax brackets and income thresholds, the new tax law also increased the income exempt from the alternative minimum tax (“AMT”) from $84,500 to $109,400 for taxpayers filing married filing jointly and from $54,300 to $70,300 for single filing taxpayers. This will result in fewer taxpayers paying the AMT.
2. The Standard Deduction verses the itemized Deductions: The new tax law has eliminated or reduced certain itemized deductions but it has increased the amount of the standard deduction. The increase in the standard deduction has provides a higher deduction for taxpayers who do not qualify for individual deduction. Taxpayers have to choose between the standard deduction and the itemized deduction when filing their tax returns. Historically, many taxpayers were able to benefit from itemized deductions, which was often the deductions of choice. With the change in the tax laws, this may no longer be the case.
A) Standard Deduction: Whereas the standard deduction used to be $12,700 in 2017 for couples filing jointly, $9,350 for individuals filing head of household, and $6,350 for an individual filing taxpayer, the standard deduction has nearly doubled. It has increased to $24,000 for a taxpayers filing jointly and $18,000 for a taxpayer head of household and $12,000 for a taxpayer filing individually.
B) Changes to Itemized Deductions: Given the changes to many of the itemized deductions with the TCJA, many taxpayers who filed their taxes benefiting from itemized deductions may find it more beneficial to file their taxes claiming the standard deduction. In the past, however, whereas the itemized deductions began to phase out at higher income levels, these phase outs have been suspended. Some of the changes to the itemized deductions that taxpayers will encounter are as follows:
i) State and Local Tax Deductions: The itemized deduction for property taxes and state and local taxes have been limited to a total of $10,000 for taxpayers filing married filing jointly and $5,000 for married filing separately. In addition, foreign property taxes are no longer deductible. However, there is an exception for foreign real property taxes and state and local taxes are deductible if paid or accrued in carrying out a trade or business.
ii) Medical Expense Deductions: Unreimbursed medical expenses used to be allowable as an itemized deduction if they exceeded 10% of the taxpayer’s adjusted gross income. For 2017 and 2018, the medical expense deduction changes to 7.5% of a tax payor’s adjusted gross income. Beginning in 2019, the medical expense deduction is limited to only unreimbursed medical expenses that exceed 10% of the taxpayer(s) adjusted gross income.
iii) Mortgage Interest Deduction Cap: Commencing in 2019, individuals who purchase a home can deduct mortgage interest on up to $750,000 of mortgage debt for taxpayers filing jointly ($375,000 for taxpayers filing married filing separately). However, if the loan for the home originated December 15, 2017 or prior, then the mortgage interest is deductible on up to a $1,000,000 loan ($500,000 for taxpayers filing married filing separately). These caps will apply to the combined loan amount for mortgages and home equity lines of credit for a first home and second home. In addition, the interest on home equity lines of credit may only be deducted if the loan was used to buy, build or substantially improve the home that secures the line of credit. This means that if a taxpayer takes out a home equity line of credit to purchase a second home, even if the home equity line of credit and mortgage fall below the foregoing caps, the interest charged on the home equity line of credit will not be deductible as the principal for this loan was used for the second home and not the home that secures the loan. The interest on the portion of the loan used to pay credit card debt, college expenses or other expenses (ie. Professional fees) will not be deductible by the taxpayer.
iv) Charitable Contributions: The limit on charitable contributions has increased from 50% to 60% of a taxpayer’s adjusted gross income. This change in the law permits taxpayers to deduct more charitable contributions. However, charitable donations that are made in exchange for, receipt of or the right to purchase tickets or seating at athletic events shall no longer be tax deductible. Similarly, seat licenses or other fees paid for the right to buy seats for athletic events are also not deductible under the new tax laws.
v) Casualty and Theft Losses: Net personal casualty and theft losses are deductible under the new tax laws to the extent that they are attributed to a federally declared disaster and exceed 10% of the taxpayer’s adjusted gross income.
vi) Deductions Suspended: The following previously permitted deductions have been suspended:
Certain job-related expenses or other miscellaneous expenses that exceeded 2% of his/her adjusted gross income.
Many unreimbursed employee expenses such as uniforms, union dues, business related meals, entertainment and travel, business standard mileage rates.
The costs for tax preparation fees, investment expenses, safe deposit fees and investment expenses from pass through entities.
Moving expenses, other than expenses incurred by members of US Armed forces who are required to move pursuant to a military order.
Personal exemptions for the taxpayer, taxpayer’s spouse and taxpayer’s dependents have been suspended. However, the child tax credits will help off set the suspension of these deductions.
3. The Child Tax Credit/Dependent Credit: The dependency deduction has been eliminated by TCJA but continues to exist in the State of New Jersey at this time. The dependency deduction was worth approximately $4,050 per child whereas the child tax credit has a value of between $1,000 to $2,000 per child. However, the child tax credit provided a dollar for dollar reduction in a tax payor’s taxes whereas the dependency deduction did not. The child tax credit will phase out at certain income levels. The child tax credit will begin to phase out when a taxpayer filing married filing separately has adjusted gross income of $200,000 or more, and $400,000 for taxpayers filing married filing jointly. In order to claim the child tax credit, the child must be either a US citizen or a US permanent resident and the child’s social security number is required.
Section 152(e) of the TCJA not only significantly increased the amount of the child tax credit, but it also permits this credit to be assigned to the noncustodial parent provided that the following conditions are met:
The parties are divorced or legally separated under a divorce decree or separate maintenance agreement or lived separate and apart at all times during the last six months of the calendar year, including parents who were never married;
One or both parents together provided more than half of the child’s total support for the calendar year;
One or both parents exercised legal custody of the child for more than half of the year; and
The custodial parent signs form 8322, a form stating that he or she will not claim the credit, and the noncustodial parent attaches a copy of the form this or her own original or amended income tax return. The custodial parent may execute form 8322 effective for one, more than one, or all future tax years.
Significantly, the release of the dependency exemption and child tax credit to the noncustodial parent does not affect any other child-related tax benefits.
In addition, a taxpayer can claim $500 for each qualifying dependent other than children. In order to qualify for this dependent credit, a dependent must be a US citizen, US national or US resident. This credit will phase out for taxpayers filing married filing jointly when their adjusted gross income exceeds $400,000 and for taxpayers married filing separately when their adjusted gross income exceeds $200,000.
4. Alternative Minimum Tax: The threshold income for when the Alternative Minimum Tax will apply has increased. It applies to taxpayers filing married filing jointly when they have adjusted gross income $1,000,000 or more and to taxpayers filing married filing separately, when they have adjusted gross income $500,000 or more.
5. Alimony Payments: Effective January 1, 2019, the tax laws that permitted alimony and separate maintenance payments to be deductible to the payor spouse and taxable to the payee spouse has been repealed.
6. Health Care Coverage: Individual taxpayers are required to report their health care coverage or an exception of same or report an individually shared responsibility payment on their income tax returns.
7. Retirement Assets: With the change in the tax laws comes new rules regarding retirement asset contributions.
A) New Qualified Retirement Plan Amounts: In 2019, the basic limit on the elective deferrals such as a taxpayers’ 401K will increase to $19,000 for individuals under 50 years of age and $25,000 for individuals over 50 years of age.
B) Recharacterization of Roth Conversion: The new laws no longer permit a taxpayer to re-characterize a conversion from a traditional IRA, SEP IRA or Simple IRA to a Roth IRA. Monies rolled over from another retirement vehicle also cannot be converted to a Roth IRA.
C) Plan Loans: If an employee has a loan from his/her retirement assets and the employee leaves his/her employment or the plan is terminated, there shall be a date certain by which the loan must be repaid.
D) Disaster Relief: The tax laws make it easier for taxpayers to use their retirement assets to recover from disaster losses incurred in federal declared disaster areas by waiving the 10% penalty, include a qualified hurricane distribution as income in equal amounts over a three year period, repay their distributions to their retirement plan, and have expanded loan availability and extend the loan repayment period.
As detailed in this article, the TCJA changes many aspects of the tax code. While taxpayers will need to adjust to a new landscape when filing their income taxes, these changes may provide some benefits to many taxpayers.
[1] Sheryl J. Seiden, Esq. is the founding partner of Seiden Family Law, LLC, a law firm dedicated to the practice of family law in Cranford, New Jersey. She is the Chair-Elect of the Family Law Section of the New Jersey State Bar Association, and is slated to be sworn in as Chair of the Section in May 2019. She is a fellow of the American Academy of Matrimonial Lawyers, New Jersey Chapter.