By now, most taxpayers are aware of some of the basics of the Tax Cuts and Jobs Act, including the decrease in individual and corporate tax rates and increase in standard deductions. But there are some aspects of the new law that haven’t gotten nearly as much attention. That’s why we’re going to reveal ten things you might not know about the tax law, but should.
1. Creation of Qualified Business Income
The Qualified Business Income (QBI) deduction is an entirely new deduction added by the TCJA.
For tax years 2018 through 2025, individuals will receive a 20% deduction for business income reported on their individual tax return.
Here’s a simple example: Kevin is an electrician who reports $100,000 of net income on his 2018 tax return. His QBI deduction would be $20,000 so he would, in effect, only be taxed on $80,000.
This deduction is available regardless of whether a taxpayer decides to itemize on their return. There are many limitations and restrictions to this provision, and a good number of CPAs consider QBI to be the most complicated provision in the tax law. We tackle the QBI deduction in this blog post. To fully understand how the QBI deduction impacts your situation, you should talk with your CPA.
2. Changes In Entertainment Expenses Deductibility
The TCJA repealed the deduction, previously limited to 50%, for business entertainment, which includes expenditures for taking clients to sporting events and shows, and paying for season tickets for various entertainment events. Since these items are no longer deductible, it is essential that you properly identify and segregate those expenses going forward.
3. Increase In Child and Family Tax Credit
The TCJA doubled the child credit for children under age 17 to $2,000. It also introduced a new $500 credit, per dependent, for a taxpayer’s dependents who are not “qualifying children,” but who still meet the IRS’s tests for dependency.
In addition, the phase-out limits for these credits have increased. Under the TCJA, joint filers whose adjusted gross income is less than $400,000 ($200,000 for others) are eligible for the child tax credit. This means that more families will be able to take advantage of the credit.
4. Limitation of State and Local Taxes
The TCJA added a limitation of $10,000 on state and local taxes. There seems to be a misconception out there that the limit is $10,000 per person, when in fact it is $10,000 per tax return.
This means that if you are a single filer you get $10,000 of itemized deductions; if you are married filing jointly, you and your spouse will get a combined $10,000 deduction. This deduction encompasses state and local income taxes, property taxes and sales taxes.
5. Elimination of Miscellaneous Itemized Deductions
One change that will have a particularly big impact is the elimination of miscellaneous itemized deductions. These deductions include investment management fees, accounting fees, and unreimbursed business deductions such as job education, job related travel, union dues, etc. Taxpayers who have historically had a large amount of investment fees, along with some insurance salespeople, could see a significant impact from this.
6. Changes to Mortgage Interest Deductions
Mortgage interest on loans used to acquire a principal residence and a second home is only deductible on debt up to $750,000 (down from $1 million). Loans in existence on December 15, 2017 are grandfathered, with a balance up to $1 million still allowed.
Interest on home equity indebtedness, such as a home equity line of credit, is no longer deductible unless the debt is really acquisition indebtedness (used for home improvement). Consider whether the indebtedness was used for business or investment purposes to determine whether an interest deduction may be available in a different category.
7. Changes to Depreciation
Over the past decade, bonus depreciation and Section 179 expensing have been popular tax planning tools for businesses.
While the rate of bonus depreciation and the amount of the maximum Section 179 limit have varied over the years, business owners have long enjoyed the ability to deduct significant portions (or the entirety) of fixed asset purchases. The TCJA increased the bonus depreciation percentage to 100% until 2023, when it will decrease by 20% until it reaches zero.
Bonus depreciation is now available for both used and new qualified assets. The Section 179 expense limit is now $1 million of allowable expensing with a total purchase threshold of $2.5 million. If you purchase more than $2.5 million in eligible fixed assets in the course of the year, you will see a reduction in the amount you are allowed to expense under Section 179.
These amounts are much higher than they have historically been and, in many cases, well beyond what an average business owner will spend in a given year. However, these higher limits and the availability of bonus depreciation and Section 179 presents some excellent tax planning opportunities.
8. Expansion of Section 529 Plans
Section 529 plans have been a widely used tool to help taxpayers save money for their child’s college education. The funds you put into your 529 plan have to be used for qualified higher education costs, but the TJCA expanded the list of what qualifies as a higher education expense. Depending on your 529 plan, you may be eligible for a state tax deduction for contributions to the plan. The TCJA expanded the opportunities available for education tax planning by allowing $10,000 per year to be distributed from 529 plans to pay for private elementary and secondary tuition.
9. Alimony Recognition Rules Changed
Under the prior law, individuals who paid alimony to an ex-spouse received a deduction for the alimony paid, while the individuals receiving the alimony treated those payments as income. Tax reform has eliminated the deduction for alimony paid and the recognition of income for alimony received effective for divorce decrees executed after December 31, 2018.
10. Credit for Family and Medical Leave
A new tax credit was created under the TCJA for employers who provide eligible employees paid family and medical leave. Many employers are already providing paid leave to employees who qualify for this deduction. The credit could be as high as 25% of the compensation paid to the employee while on leave, resulting in large tax savings.
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