As tax years go, it’s been a busy one! Here are developments for individual taxpayers and their advisors to consider as 2018 draws to a close.
Tax Cuts and Jobs Act (TCJA)
On December 22, 2017, President Donald Trump signed the tax legislation informally known as the TCJA into law, which provided the most significant tax law changes in over 30 years for individuals, businesses, exempt organizations and trusts and estates. For more on these changes, including the latest on TCJA-related guidance, visit our Tax Reform Resource Center. These are some of the key provisions, most of which took effect January 1, 2018, and expire December 31, 2025, absent further legislative action.
- Reduced rates on ordinary income: Under the TCJA, the top marginal tax rate was temporarily reduced from 39.6 percent to 37 percent and the remaining six individual tax brackets and rates were adjusted. For more, see our individual brackets chart.
- Created qualified business income (QBI) deduction: New Internal Revenue Code (IRC) Section 199A provides a 20 percent deduction of domestic QBI to individuals, trusts and estates for the 2018–2025 tax years. Learn more with our flowchart and whitepaper.
- Increased individual alternative minimum tax (AMT) exemption and phase-out amounts: The TCJA temporarily increased the individual AMT exemption amounts for 2018 to $70,300 for single filers ($109,400 for married filing jointly (MFJ)) and increased the phase-out threshold of this increased exemption to begin at $500,000 for single filers ($1 million MFJ).
- Consolidated standard deduction and personal exemption: The TCJA modified the standard deduction by nearly doubling it to $12,000 for single filers ($24,000 MFJ) for 2018. At the same time, the TCJA repealed the personal exemption and deduction phaseout under pre-TCJA law. Taken together, these changes are expected to simplify tax return reporting through 2025 by reducing the number of individuals who will itemize deductions.
- Enhanced child tax credit (CTC): Under the TCJA, the CTC is temporarily increased to a nonindexed $2,000 ($1,400 refundable) per qualifying child, as well as a $500 nonrefundable credit for each dependent who isn’t a qualifying child. The TCJA also increased the credit’s phase-out threshold to begin at $200,000 for single filers ($400,000 MFJ).
- Modified and added loss limitations: The TCJA modified the net operating loss (NOL) rules to limit the deduction to 80 percent of taxable income for losses arising in tax years beginning after December 31, 2017. The TCJA provides that losses arising in tax years ending after December 31, 2017, may generally not be carried back(i); however, these losses are carried forward indefinitely. In addition, the TCJA added a new limitation on excess business losses for the 2018–2025 tax years. This new provision limits the aggregate deductions attributable to trades or businesses over the aggregate gross income/gain to $250,000 for single filers ($500,000 MFJ) with any excess losses treated as an NOL.
- Curtailed itemized deductions: In addition to repealing the so-called Pease limitation, which phased out overall itemized deductions based on adjusted gross income (AGI), many itemized deductions are temporarily modified or repealed under the TCJA:
- Medical and dental expense: Limited the deduction for qualified out-of-pocket medical expenses paid or incurred during the year to the extent these amounts exceed 7.5 percent of AGI for 2017 and 2018 and 10 percent of AGI for 2019 through 2025.
- State and local income, real estate and personal property tax expense: Capped the combined deduction for amounts not paid or accrued in a trade or business to $10,000 ($5,000 married filing separately).
- Home mortgage interest expense: Limited the deduction for mortgage interest paid or incurred to that attributable to the first $750,000 of acquisition indebtedness incurred after December 15, 2017. Also eliminated the deduction for interest paid or incurred on home equity loans except where the proceeds are used for home acquisition or improvement.
- Gifts to charity: Increased the limitation on an individual’s charitable contribution deduction for cash (contributed) to 50-percent-organizations to 60 percent of their contribution base(ii). Also repealed the 80 percent deduction of the amount paid to colleges for the right to purchase tickets for athletic events after December 31, 2017.
- Miscellaneous itemized deductions: Repealed the deduction for amounts subject to the 2 percent floor of AGI, e.g., unreimbursed employee business expenses, investment management fees and tax preparation fees.
- Other provisions:
- Allowed elementary and secondary school expenses of up to $10,000 to be treated as qualified expenses for IRC §529 plans.
- Eliminated the deduction and income exclusion for moving expenses, except for active-duty members of the armed forces.
- Reduced the individual shared responsibility payment to zero for months beginning after December 31, 2018.
- Repealed both the deduction and income inclusion for alimony paid effective for divorce decrees executed after December 31, 2018.
Final Regulations Regarding Adequate Substantiation for Charitable Contributions
On July 30, 2018, the IRS published final regulations implementing previously enacted changes to the substantiation requirements for charitable contributions. Some of the key clarifications provided in the guidance include:
- Requires donors to maintain a bank record or a written communication from the donee organization showing its name, date and amount of the contribution for contributions of cash, check or other monetary gift. A blank pledge card isn’t sufficient substantiation for this purpose.
- Requires donors to maintain a receipt from the donee and keep records showing the name and description of the gift for contributions of noncash property.
- Prevents a charitable deduction for any cash or property contribution of $250 or more unless the taxpayer can substantiate with contemporaneous written acknowledgement from the donee. A canceled check isn’t sufficient substantiation for this purpose.
- Provides appraisals must be attached to tax returns for charitable contribution carryover years if it was required in the year of contribution.
- Defines a verifiable education requirement for qualified appraisers.
For more on these and other developments for individual taxpayers, contact Damien or your trusted BKD advisor.
(i)Except in the case of property/casualty insurance companies and certain farm losses.
(ii)AGI computed without regard to any NOL carryback.