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Click the links below to access our Thomson Reuters Checkpoint Special Studies on the “Tax Cuts and Jobs Act”:
- Individual Tax Changes in the “Tax Cuts and Jobs Act”
- Business Tax Changes in the “Tax Cuts and Jobs Act”
- Foreign Income, Foreign Persons Tax Changes in the “Tax Cuts and Jobs Act”
- S Corporation, Partnership & Other Changes in the “Tax Cuts and Jobs Act”
- Estate and Gift Tax Changes in the “Tax Cuts and Jobs Act”
- Pension and Benefit Changes in the “Tax Cuts and Jobs Act”
Note: The information contained in these Special Studies is current as of December 18, 2017. We have re-issued them in case you missed them in yesterday’s Newsstand or the Federal Tax Daily Update for Checkpoint subscribers. Check this page periodically for further updates.
In this Issue: Click a summary link to move down to that Article
Reuters Featured Article of the Day
- U.S. House OKs tax overhaul, but stumbles on detailsWASHINGTON (Reuters) – Republicans in the U.S. Congress hit a last-minute snag on Tuesday in their drive to approve the biggest tax code rewrite in 30 years, requiring another vote on…
Federal Tax Highlights
- Law firm shareholders were liable for trust fund recovery penaltyA district court has upheld IRS’s assessment of trust fund recovery penalties against a law firm’s shareholders in a case that arose from financial decisions made by the law firm during an…
- 2017 Tax Reform: Client Letter on last-minute year-end moves in light of Tax Cuts and Jobs ActWith the Tax Cuts and Jobs Act reportedly headed for the President’s desk shortly, many clients may be asking what they can do before year-end to best position themselves for tax savings…
- 2017 Tax Reform: Provisions included in House and/or Senate bills, omitted from Conference billOn Dec. 15, the House-Senate Conference Committee—having reconciled and merged the differing House and Senate provisions into a single piece of legislation—released its Conference…
- 2017 Tax Reform: Checkpoint Special Study on Individual Tax Changes in the “Tax Cuts and Jobs Act”On December 19, the House approved H.R. 1, the “Tax Cuts and Jobs Act”, the sweeping GOP tax reform measure, by a vote of 227 to 203. Although some procedural complications held up…
- 2017 Tax Reform: Checkpoint Special Study on Business Tax Changes in the “Tax Cuts and Jobs Act”On December 19, the House approved H.R. 1, the “Tax Cuts and Jobs Act,” the sweeping tax reform measure, by a vote of 227 to 203. Although some procedural complications held up full…
- Bankers ask for income tax tweak ahead of potential law changeThe FASB needs to make a change to its accounting standard for income taxes ahead of potential tax law changes so the tax effect of items typically presented in other comprehensive income…
- Inspection reports fault 31 Firms for audit deficienciesThe PCAOB faulted 31 firms for audit deficiencies in its latest round of inspection reports, released on December 12, 2017. The board cleared another 25 firms. The audit industry watchdog also…
» Reuters Featured Article of the Day
U.S. House OKs tax overhaul, but stumbles on details
By Amanda Becker, Susan Cornwell, Kevin Drawbaugh, Peter Cooney, David Morgan and Andy Sullivan
WASHINGTON (Reuters) – Republicans in the U.S. Congress hit a last-minute snag on Tuesday in their drive to approve the biggest tax code rewrite in 30 years, requiring another vote on Wednesday and delaying what would be their first major legislative win under President Donald Trump.
The Republican-controlled House of Representatives passed the tax package on Tuesday afternoon, sending the bill to the Senate, where a staff official ruled that three provisions of the House bill did not comply with the Senate’s complex rules, said Independent Senator Bernie Sanders.
As of early evening, the plan was for the Senate to delete the three offending provisions and vote on the bill. If approved, which is widely expected, the bill would then be sent back to the House for another vote on Wednesday.
The provisions in question deal with using educational savings accounts for home schooling and with private university endowments. The Senate parliamentarian’s ruling against the provisions threw a wrench into what would have been a day of celebration for Republicans.
The bill includes steep tax cuts for corporations and wealthy taxpayers and a revamp of how the United States taxes multinational companies, as well as a new tax deduction for the owners of “pass-through” businesses, ranging from mom-and-pop stores to large real estate and financial enterprises.
It offers temporary tax rate cuts for some individuals and families, while reducing sharply the number of Americans who itemize deduction on their tax returns and cutting back the number and scope of available deductions.
As Treasury Secretary Steven Mnuchin looked on from the gallery, the House passed the bill by a vote of 227-203, overcoming united opposition from Democrats, who blasted the bill as a giveaway to corporations and the wealthy.
Twelve Republicans voted against it, including 11 from New York, California and New Jersey, all high-tax states where affluent homeowners could be hurt by the bill’s new limits on deducting state and local taxes.
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» Federal Tax Highlights
Law firm shareholders were liable for trust fund recovery penalty
Spizz v. U.S., (DC NY 12/4/2017) 120 AFTR 2d ¶ 2017-5550
A district court has upheld IRS’s assessment of trust fund recovery penalties against a law firm’s shareholders in a case that arose from financial decisions made by the law firm during an extended period of financial distress, where at least part of the difficulty was attributable to another shareholder’s larcenous conduct.
Background. Code Sec. 6672 imposes the trust fund recovery penalty on any person who:
- Is responsible for collecting, accounting for, and paying over payroll taxes; and
- Willfully fails to perform this responsibility.
The amount of the penalty is equal to the amount of the tax that was not collected and paid. The penalty is imposed on a responsible person, i.e., anyone in a business entity who has the duty to collect, account for, or pay over the tax.Although the Code doesn’t define who is responsible for purposes of the penalty, the Second Circuit has said that the determinative question is whether the individual has significant control over the enterprise’s finances. The Second Circuit has instructed courts to consider the following relevant factors in determining whether an individual had significant control: whether the individual
- Is an officer or member of the board of directors;
- Owns shares or possesses an entrepreneurial stake in the company;
- Is active in the management of day-to-day affairs of the company;
- Has the ability to hire and fire employees;
- Makes decisions regarding which, when, and in what order outstanding debts or taxes will be paid;
- Exercises control over daily bank accounts and disbursement records; and
- Has check-signing authority.
(Fiataruolo v. U.S., (CA 2 1993) 72 AFTR 2d 93-6550)A failure to pay over taxes is willful for Code Sec. 6672 purposes if a responsible person makes a deliberate choice to voluntarily, consciously, and intentionally pay other creditors rather than make tax payments. Willful conduct may also include a reckless disregard of obvious or known risks. More than mere negligence is required for willfulness; a person is not willful if as a result of negligence he is unaware of the default in the payment of payroll taxes. However, a reckless disregard of the facts and known risks that taxes were not being paid is sufficient to hold a responsible party liable. (Calderone v. U.S., (CA 6 1986) 58 AFTR 2d 86-5703)
The Second Circuit recognizes a “reasonable cause” exception to Code Sec. 6672 liability that applies where a responsible person harbors a reasonable belief that the taxes were paid. But this exception is severely limited: “[E]ven if a responsible person did not know contemporaneously of the company’s nonpayment of withholding taxes, he or she will be held liable for any nonpayment if, when he or she became aware of the delinquency, the company had liquid assets with which to pay the overdue taxes”. A responsible person bears the burden of proving that the company’s assets were encumbered and thus unavailable to pay any outstanding tax liability. (O’Callaghan v. U.S., (DC NY 1996) 78 AFTR 2d 96-7089)
Facts. From 2009 through mid-September 2012, Spizz, Todtman, and Nachamie were the named shareholders of a law firm, in which they each held a one-third interest. For most of the period from April 2009 through March 2012, the firm failed to pay trust fund taxes to IRS.
Todtman was the founder and President of the firm. He held a significant managerial role. He had authority to hire and fire employees and determine attorney compensation levels without the approval of other shareholders. He was responsible for running the day to day operations of the firm. He signed the firm’s quarterly federal tax returns for the third and fourth quarters of 2009 and the first quarter of 2010.
Spizz was Vice-President of the firm and had authority to sign checks from the firm’s operating and payroll accounts. He asserted that before June 2010, he only did so upon Todtman’s authorization. From at least 2009 until the firm closed in April 2015, Spizz was authorized to and did guarantee loans on behalf of the firm. Spizz also had authority to review and sign the firm’s corporate tax returns and quarterly tax returns, and he signed the firm’s quarterly tax return for the second quarter of 2010.
On or before June 10, 2010, Spizz discovered that the firm had failed to pay the trust fund taxes it had been withholding. Soon thereafter, Spizz and Nachamie revoked Todtman’s managerial responsibilities, and they began managing the firm’s finances. Spizz initially assumed at least some responsibility for these tasks, but claims to have passed these duties on to Nachamie around mid-2011.
In or around December 2013, Spizz noticed an inconsistency in one of the firm’s client escrow accounts. Further investigation, with the assistance of a forensic accountant, revealed that Nachamie had looted almost $1 million from the firm’s accounts.
Court’s decision. The district court concluded that both Todtman and Spizz were responsible persons and that both willfully failed to remit trust fund taxes to IRS while the firm was paying other creditors.
Responsible persons. The court reasoned that Todtman was a responsible person because he not only founded the firm, but was also President and one-third owner of that firm for the periods that IRS assessed tax penalties against him. While Todtman asserted that he was denied independent access to the firm’s checkbooks and check authorization from 2008, the court noted that he admitted that he could still sign checks when it was demanded of him by, or authorized by, the other partners. Further, Todtman assertion as to his check writing limitations was undercut by his testimony that he would sign checks if other shareholders were unavailable.
In addition, according to Todtman’s own admissions he satisfied nearly every factor courts examine in determining responsibility for trust fund tax payments, including from ’78 through 2010. He determined the firm’s financial policy, paid bills and creditors, opened and closed bank accounts, guaranteed loans, signed checks, made federal tax deposits, submitted payroll tax returns, and made employment decisions.
Although he may not have exercised his authority over the firm’s finances to the same extent as Todtman, the court also concluded that Spizz was a responsible person. From 2009 through 2011, Spizz controlled one-third of the firm’s shares, and during that period he acted as Vice President. He, along with Nachamie, exercised managerial authority in June 2010, first by removing financial responsibility from Todtman and then by assuming that same responsibility. This, the court found, evidenced that Spizz held more than mere technical authority, and that he could have been more involved in the firm’s financial decisions had he earlier so chosen. While other shareholders at the firm may also have been responsible persons during the relevant time period, the control Spizz’s colleagues exerted over the firm’s finances did not detract from the authority that he possessed.
Willful failure to pay. The district court determined that Todtman’s failure to pay the tax was willful as a matter of law. During 2009 and 2010, he admitted that he was aware of the firm’s responsibility to pay trust fund taxes and that the firm was paying other creditors before IRS. Despite signing the firm’s quarterly federal tax returns for the third and fourth quarters of 2009 and the first quarter of 2010, he maintained that he was unaware whether the firm had timely and fully paid the trust fund taxes for those quarters. The court reasoned that, even if true, Todtman’s purported ignorance on this point amounted to a reckless disregard for the risk that the firm would fail to pay the trust fund taxes, given his responsibility over the firm’s tax payments in conjunction with his signing-off on the tax forms.
Furthermore, from 2009 until June 2010—while the trust fund taxes remained in arrears—Todtman signed checks on behalf of the firm in order to disburse funds for payroll, payments to creditors, and tax deposits. Todtman contended that he “did not have the authority during the subject period to determine which checks were written”. However, the court found that such authority was not required for a finding of willfulness, and even if it were, he had sufficient authority within the firm to be responsible for the firm’s handling of tax collection and payment.
The district court also found that Spizz willfully failed to pay over the tax, first analyzing the tax periods before June 2010, and the tax periods after that time.
IRS failed to present any evidence of financial activity at the firm that would have put Spizz on notice of outstanding tax liabilities at an earlier time than June 10, 2010, and Spizz presented sufficient evidence to establish his reasonable belief that the trust fund taxes were current before June 2010. Given this reasonable belief, the court had to determine whether, at that time, the firm had unencumbered assets available to pay down the outstanding tax liability, in which case Spizz’s failure to apply those assets toward the trust fund taxes would constitute willfulness.
The district court concluded that the record established not only that on the date that Spizz became aware of the tax liability the firm had funds available to pay trust fund taxes, but also that the firm diverted those funds to other creditors. The court rejected Spizz’s defense that as of June 2010,
- The firm’s bank held a lien against all of the firm’s assets and
- The firm’s operating account carried a negative balance of over $20,000.
The district court noted that the Second Circuit had not opined as to the degree to which a lien can be considered an encumbrance. However, the Sixth Circuit—the Court of Appeals to have addressed this issue most directly—recognized that the existence of a superior lien, without more, did not create an encumbrance for purposes of Code Sec. 6672, unless there were also conditions imposed by the lender which rendered the funds unavailable for payment of the trust fund taxes to IRS for the time period in question. (Bell v. U.S., (CA 6 2004) 93 AFTR 2d 2004-369) Here, Spizz presented no evidence that the lien carried such conditions.
As to the firm’s supposed negative operating account balance, the bank statement from June 10, 2010 (the date on which Spizz learned of the tax deficiency) established only that the firm arrived at a negative balance after disbursing over $80,000 on that date. The largest deduction from the firm’s operating account on that date was a transfer to another one of the firm’s accounts in the amount of $79,117, which funds the firm then debited toward payroll. The record established not only that the firm had funds available to pay trust fund taxes on the date that Spizz became aware of the tax liability, but also that the firm diverted those funds to other creditors.
The district court noted that courts have found willfulness where a responsible person fails to assure that a company timely remits trust fund taxes after having notice of previous tax delinquencies. Thus, after Spizz became aware of the firm’s tax liabilities in June 2010, he could no longer maintain a reasonable belief that other members of the firm would timely remit trust fund taxes. To the contrary, these problems gave rise to the duty to follow up and see that the taxes were paid. Spizz’s failure to do so constituted reckless disregard that met Code Sec. 6672’s willfulness requirement.
References: For who is a “responsible person”, see FTC 2d/FIN ¶ V-1704; United States Tax Reporter ¶ 66,724.
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2017 Tax Reform: Client Letter on last-minute year-end moves in light of Tax Cuts and Jobs Act
With the Tax Cuts and Jobs Act reportedly headed for the President’s desk shortly, many clients may be asking what they can do before year-end to best position themselves for tax savings, and to avoid or soften the impact of disappearing deductions. The following Client Letter offers year-end moves that can accomplish those goals.
Congress is enacting the biggest tax reform law in thirty years, one that will make fundamental changes in the way you, your family and your business calculate your federal income tax bill, and the amount of federal tax you will pay. Since most of the changes will go into effect next year, there’s still a narrow window of time before year-end to soften or avoid the impact of crackdowns and to best position yourself for the tax breaks that may be heading your way. Here’s a quick rundown of last-minute moves you should think about making.
Lower tax rates coming. The Tax Cuts and Jobs Act will reduce tax rates for many taxpayers, effective for the 2018 tax year. Additionally, many businesses, including those operated as passthroughs, such as partnerships, may see their tax bills cut.
The general plan of action to take advantage of lower tax rates next year is to defer income into next year. Some possibilities follow:
- If you are about to convert a regular IRA to a Roth IRA, postpone your move until next year. That way you’ll defer income from the conversion until next year and have it taxed at lower rates.
- Earlier this year, you may have already converted a regular IRA to a Roth IRA but now you question the wisdom of that move, as the tax on the conversion will be subject to a lower tax rate next year. You can unwind the conversion to the Roth IRA by doing a recharacterization—making a trustee-to-trustee transfer from the Roth to a regular IRA. This way, the original conversion to a Roth IRA will be cancelled out. But you must complete the recharacterization before year-end. Starting next year, you won’t be able to use a recharacterization to unwind a regular-IRA-to-Roth-IRA conversion.
- If you run a business that renders services and operates on the cash basis, the income you earn isn’t taxed until your clients or patients pay. So if you hold off on billings until next year—or until so late in the year that no payment will likely be received this year—you will likely succeed in deferring income until next year.
- If your business is on the accrual basis, deferral of income till next year is difficult but not impossible. For example, you might, with due regard to business considerations, be able to postpone completion of a last-minute job until 2018, or defer deliveries of merchandise until next year (if doing so won’t upset your customers). Taking one or more of these steps would postpone your right to payment, and the income from the job or the merchandise, until next year. Keep in mind that the rules in this area are complex and may require a tax professional’s input.
- The reduction or cancellation of debt generally results in taxable income to the debtor. So if you are planning to make a deal with creditors involving debt reduction, consider postponing action until January to defer any debt cancellation income into 2018.
Disappearing or reduced deductions, larger standard deduction. Beginning next year, the Tax Cuts and Jobs Act suspends or reduces many popular tax deductions in exchange for a larger standard deduction. Here’s what you can do about this right now:
- Individuals (as opposed to businesses) will only be able to claim an itemized deduction of up to $10,000 ($5,000 for a married taxpayer filing a separate return) for the total of
- State and local property taxes; and
- State and local income taxes.
To avoid this limitation, pay the last installment of estimated state and local taxes for 2017 no later than Dec. 31, 2017, rather than on the 2018 due date. But don’t prepay in 2017 a state income tax bill that will be imposed next year – Congress says such a prepayment won’t be deductible in 2017. However, Congress only forbade prepayments for state income taxes, not property taxes, so a prepayment on or before Dec. 31, 2017, of a 2018 property tax installment is apparently OK.
- The itemized deduction for charitable contributions won’t be chopped. But because most other itemized deductions will be eliminated in exchange for a larger standard deduction (e.g., $24,000 for joint filers), charitable contributions after 2017 may not yield a tax benefit for many because they won’t be able to itemize deductions. If you think you will fall in this category, consider accelerating some charitable giving into 2017.
- The new law temporarily boosts itemized deductions for medical expenses. For 2017 and 2018 these expenses can be claimed as itemized deductions to the extent they exceed a floor equal to 7.5% of your adjusted gross income (AGI). Before the new law, the floor was 10% of AGI, except for 2017 it was 7.5% of AGI for age-65-or-older taxpayers. But keep in mind that next year many individuals will have to claim the standard deduction because many itemized deductions have been eliminated. If you won’t be able to itemize deductions after this year, but will be able to do so this year, consider accelerating “discretionary” medical expenses into this year. For example, before the end of the year, get new glasses or contacts, or see if you can squeeze in expensive dental work such as an implant.
Other year-end strategies. Here are some other last minute moves that can save tax dollars in view of the new tax law:
- The new law substantially increases the alternative minimum tax (AMT) exemption amount, beginning next year. There may be steps you can take now to take advantage of that increase. For example, the exercise of an incentive stock option (ISO) can result in AMT complications. So, if you hold any ISOs, it may be wise to postpone exercising them until next year. And, for various deductions, e.g., depreciation and the investment interest expense deduction, the deduction will be curtailed if you are subject to the AMT. If the higher 2018 AMT exemption means you won’t be subject to the 2018 AMT, it may be worthwhile, via tax elections or postponed transactions, to push such deductions into 2018.
- Like-kind exchanges are a popular way to avoid current tax on the appreciation of an asset, but after Dec. 31, 2017, such swaps will be possible only if they involve real estate that isn’t held primarily for sale. So if you are considering a like-kind swap of other types of property, do so before year-end. The new law says the old, far more liberal like-kind exchange rules will continue apply to exchanges of personal property if you either dispose of the relinquished property or acquire the replacement property on or before Dec. 31, 2017.
- For decades, businesses have been able to deduct 50% of the cost of entertainment directly related to or associated with the active conduct of a business. For example, if you take a client to a nightclub after a business meeting, you can deduct 50% of the cost if strict substantiation requirements are met. But under the new law, for amounts paid or incurred after Dec. 31, 2017, there’s no deduction for such expenses. So if you’ve been thinking of entertaining clients and business associates, do so before year-end.
- Under current rules, alimony payments generally are an above-the line deduction for the payor and included in the income of the payee. Under the new law, alimony payments aren’t deductible by the payor or includible in the income of the payee, generally effective for any divorce decree or separation agreement executed after 2017. So if you’re in the middle of a divorce or separation agreement, and you’ll wind up on the paying end, it would be worth your while to wrap things up before year end. On the other hand, if you’ll wind up on the receiving end, it would be worth your while to wrap things up next year.
- The new law suspends the deduction for moving expenses after 2017 (except for certain members of the Armed Forces), and also suspends the tax-free reimbursement of employment-related moving expenses. So if you’re in the midst of a job-related move, try to incur your deductible moving expenses before year-end, or if the move is connected with a new job and you’re getting reimbursed by your new employer, press for a reimbursement to be made to you before year-end.
- Under current law, various employee business expenses, e.g., employee home office expenses, are deductible as itemized deductions if those expenses plus certain other expenses exceed 2% of adjusted gross income. The new law suspends the deduction for employee business expenses paid after 2017. So, we should determine whether paying additional employee business expenses in 2017, that you would otherwise pay in 2018, would provide you with an additional 2017 tax benefit. Also, now would be a good time to talk to your employer about changing your compensation arrangement—for example, your employer reimbursing you for the types of employee business expenses that you have been paying yourself up to now, and lowering your salary by an amount that approximates those expenses. In most cases, such reimbursements would not be subject to tax.
Please keep in mind that I’ve described only some of the year-end moves that should be considered in light of the new tax law. If you would like more details about any aspect of how the new law may affect you, please do not hesitate to call.
Very truly yours,
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2017 Tax Reform: Provisions included in House and/or Senate bills, omitted from Conference bill
On Dec. 15, the House-Senate Conference Committee—having reconciled and merged the differing House and Senate provisions into a single piece of legislation—released its Conference Report on the “Tax Cuts and Jobs Act” (the Act), a sweeping tax reform proposal. As of Dec. 19, the House and Senate were in the process of voting on the Conference version of the Act. In this article, we list the more significant provisions that were included in the House and/or Senate versions of the Act but were not included in the Conference version.
For discussion of the individual income tax provisions in the Act, see ¶ 5.
For provisions related to businesses, see ¶ 60.
For provisions related to S corporations, partnerships, tax-exempt organizations, electing small business trusts, and retirement plans, see ¶ 59.
For provisions related to foreign income and persons, see ¶ 35.
Here are the significant provisions that were included in either the version of the Act that was passed by the House or the version of the Act that was passed by the Senate, or that were included in both of those versions, that were not included in the Conference version.
Individual income tax provisions. The following individual income tax provisions were not included in the Conference version.
Repeal of credit for the elderly and permanently disabled. (House Sec. 1102(a))
Repeal of credit for plug-in electric drive motor vehicles. (House Sec. 1102(c))
Modification of taxpayer identification number requirements for the earned income credit and American Opportunity credit. This provision would have created stricter requirements with respect to which identification numbers would be needed in order to claim the earned income credit (EIC) or the American Opportunity tax credit (AOTC). (House Sec. 1103; Senate Sec. 11022)
Procedures to reduce improper claims of EIC. A provision would have required taxpayers to claim all allowable deductions in computing net earnings from self-employment for EIC purposes. The provision also would have modified employer reporting requirements associated with the deduction and withholding of certain employment taxes on wages. (House Sec. 1104)
Certain income disallowed for purposes of the EIC. A provision would have limited earned income for purposes of the EIC to amounts substantiated by the taxpayer on statements furnished or returns filed under third party information reporting requirements, or amounts substantiated by the taxpayer’s books and records. (House Sec. 1105)
Reform of AOTC and repeal of lifetime learning credit. A provision would have liberalized an AOTC rule and repealed the lifetime learning credit. (House Sec. 1201)
Repeals of various other education-related provisions. The following other education-related provisions would have been repealed:
- The deduction for student loan interest;
- The deduction for qualified tuition and related expenses;
- The exclusions from gross income and wages for qualified tuition reductions—generally available to teaching and research assistants who are students at the graduate level;
- The exclusion for interest on United States savings bonds used for higher education expenses; and
- The exclusion for educational assistance programs (up to $5,250 annually of educational assistance provided by an employer to an employee). (House Sec. 1204)
Termination of deduction and exclusions for contributions to medical savings accounts. A provision would have caused contributions to Archer Medical Savings Accounts (MSAs) to not be deductible or excludible from gross income and wages. (House Sec. 1311)
Changes to above-the-line employee business expenses. The House bill would have repealed the present-law provisions allowing for above-the-line deductions for expenses of qualified performing artists, expenses of State or local government officials performing services on a fee basis, and expenses of eligible educators. (House Sec. 1312) The Senate bill would have increased the $250 limit for the deduction of certain expenses of eligible educators, in determining adjusted gross income, to $500. (Senate Sec. 11032)
Limitation on exclusion for employer-provided housing. (House Sec. 1401)
Modification of exclusion of gain on sale of a principal residence. A provision would have extended the length of time a taxpayer must own and use a residence in order to qualify for the exclusion of gain on sale of a principal residence. It also would have limited the use of the exclusion to one sale or exchange during any five-year period. (House Sec. 1402; Senate Sec. 11047)
Repeal of exclusion for dependent care assistance programs. The exclusion from the gross income of an employee of up to $5,000 annually for employer-provided dependent care assistance would have been repealed. (House Sec. 1404)
Repeal of exclusion for adoption assistance programs. The exclusion from an employee’s gross income for qualified adoption expenses paid or reimbursed by an employer would have been repealed. (House Sec. 1406)
Exclusion from gross income of certain amounts received by wrongly incarcerated individuals. A provision would have extended the waiver on the statute of limitations with respect to filing a claim for a credit or refund of an overpayment of tax resulting from certain amounts received by wrongly incarcerated individuals being excluded from gross income. (Senate Sec. 11027)
Required use of FIFO for determining basis of securities. A provision would have required the use of the first-in-first-out (FIFO) method for determining the basis of most securities, including most shares of stock and most bonds, and not allowed basis to be determined by specific identification. (Senate Sec. 13533)
Retirement plan provisions. The following retirement plan provisions were not included in the Conference version.
Reduction in minimum age for allowable in-service distributions. (House Sec. 1502)
Modification of rules governing hardship distributions. (House Sec. 1503)
Modification of rules relating to hardship withdrawals from cash or deferred arrangements. (House Sec. 1504; Senate Sec. 11033(c))
Modification of nondiscrimination rules for certain plans providing benefits or contributions to older, longer service participants. (House Sec. 1506)
Business provisions. The following business provisions were not included in the Conference version.
Repeal of special rule for sale or exchange of patents. (House Sec. 3312)
Treatment of expenses in contingency fee cases. A provision would have denied attorneys an otherwise-allowable deduction for litigation costs paid under arrangements that are primarily on a contingent fee basis, until the contingency ends. (House Sec. 3316)
Repeal of employer-provided child care credit. (House Sec. 3402)
Repeal of work opportunity tax credit. (House Sec. 3404)
Repeal of deduction for certain unused business credits. A provision would have repealed Code Sec. 196 which allows a deduction to the extent that certain portions of the general business credit expire unused after the end of the carryforward period. (House Sec. 3405; Senate Sec. 13403)
Termination of new markets tax credit. (House Sec. 3406)
Repeal of credit for expenditures to provide access to disabled individuals. (House Sec. 3407)
Modification of credit for portion of employer social security taxes paid with respect to employee tips. (House Sec. 3408)
Repeal of enhanced oil recovery credit and credit for producing oil and gas from marginal wells. (House Sec. 3504; House Sec. 3505)
Energy provisions. The following energy provisions were not included in the Conference version.
Modifications to credit for electricity produced from certain renewable resources. (House Sec. 3501)
Modification of the energy investment tax credit. (House Sec. 3502)
Extension and phaseout of residential energy efficient property credit. A provision would have extended the residential energy efficient property credit with respect to nonsolar qualified property through Dec. 31, 2021, but would have included a phaseout beginning in 2020. (House Sec. 3503)
Bond provisions. The following bond provisions were not included in the Conference version.
Termination of private activity bonds. (House Sec. 3601)
No tax-exempt bonds for professional stadiums. A provision would have provided that the interest on bonds, the proceeds of which are to be used to finance or refinance capital expenditures allocable to a professional sports stadium, was not tax-exempt. (House Sec. 3604)
Exempt organization provisions. The following exempt organization provisions were not included in the Conference version.
Provisions related to the unrelated business tax. (House Sec. 5001 and 5002)
Exempt organization excise tax provisions. (House Sec. 5101, 5102, and 5104)
Allowance of political speech. A provision would have loosened the rule that charities and churches can’t engage in politics. It would have allowed a minimal amount of such activity as part of their operations, without jeopardizing their tax-exempt status. (House Sec. 5201)
Additional reporting requirements for donor advised fund sponsoring organizations. (House Sec. 5202)
Tax practice provision. The following tax practice provision was not included in the Conference version.
Liberalization of user fee requirements for installment agreements. (Senate Sec. 11073)
Provisions related to foreign income/persons. The following provisions related to foreign income/persons were not included in the Conference version.
Transfers of intangible property from CFCs.For certain distributions made by a controlled foreign corporation (CFC) of intangible property held by a CFC on the date of enactment, the fair market value (FMV) of the property on the date of the distribution would have been treated as not exceeding the adjusted basis of the property immediately before the distribution. (Senate Sec. 14203)
Inflation adjustment for Subpart F de minimis exception. Under pre-Act law, a U.S. parent of a foreign subsidiary is subject to current U.S. tax on its pro rata share of the subsidiary’s subpart F income. However, a de minimis rule states that if the gross amount of such income is less than the lesser of 5% of the foreign subsidiary’s gross income or $1 million, then the U.S. parent is not subject to current U.S. tax on any of the income.
Under the provision, the $1 million threshold would have been adjusted for inflation.(House Sec. 4203; Senate Sec. 14212)
Foreign subsidiary passive income exception made permanent. Under pre-Act law, a U.S. parent of a foreign subsidiary generally is subject to current U.S. tax on passive income earned by the foreign subsidiary. However, for tax years of foreign subsidiaries beginning before 2020, a special “look-through” rule provides that passive income received by one foreign subsidiary from a related foreign subsidiary generally is not includible in the taxable income of the U.S. parent, provided such income was not subject to current U.S. tax or effectively connected with a U.S. trade or business.
This provision would have been made permanent. (House Sec. 4204; Senate Sec. 14217)
Repeal of tax on foreign subsidiary investments in U.S. property. The requirement in subpart F that U.S. shareholders recognize income when earnings are repatriated in the form of increases in investment by a CFC in U.S. property would have been amended to provide an exception for domestic corporations that are U.S. shareholders in the CFC. (House Sec. 4002; Senate Sec. 14218)
Denial of interest expense deduction of U.S. shareholders with excess domestic indebtedness. A portion of a domestic corporation’s interest expense would have been denied if its worldwide group had excess borrowing in the U.S. (House Sec. 4302; Senate Sec. 14221)
Acceleration of election to allocate interest, etc., on a worldwide basis. Under pre-Act law, for tax years that begin after Dec. 31, 2020, an election is available under which interest can be allocated among foreign and domestic corporations on a worldwide basis.
There would been an acceleration of the effective date to tax years that began after Dec. 31, 2017. (Senate Sec. 14303)
Modification to source rules involving possessions. Changes would have been made to the rules for determining whether certain income is possession source income, including to a rule specific to capital gains earned by U.S. Virgin Islands residents. (Senate Sec. 14504)
Extension of deduction allowable with respect to income attributable to domestic production activities in Puerto Rico. (House Sec. 4401)
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2017 Tax Reform: Checkpoint Special Study on Individual Tax Changes in the “Tax Cuts and Jobs Act”
Text of the “Tax Cuts and Jobs Act.”
Joint Explanatory Statement of the Committee of Conference.
On December 19, the House approved H.R. 1, the “Tax Cuts and Jobs Act”, the sweeping GOP tax reform measure, by a vote of 227 to 203. Although some procedural complications held up full Congressional passage on that date, it is generally anticipated that the Senate will make a few revisions to the bill, pass it, and return the revised bill for the House’s approval on Wednesday, December 20th, with the bill making its way to President Trump for his expected signature shortly thereafter. This article describes the Act’s changes that would affect individuals, including the new rates and brackets, the increased standard deduction and elimination of personal exemptions, and the repeal of the individual mandate under the Affordable Care Act.
For provisions related to businesses, see ¶ 60.
For provisions related to S corporations, partnerships, tax-exempt organizations, electing small business trusts, and retirement plans, see ¶ 59.
For provisions related to foreign income and persons, see ¶ 35.RIA observation: One of the major distinctions between the House and Senate versions of the tax bill was that the Senate bill, in order to comply with certain budgetary constraints, contained a “sunset”, or an expiration date, for many of its provisions—e.g. they apply for tax years beginning before Jan. 1, 2026. Accordingly, many of the individual tax provisions in the Act are temporary (as opposed to the business provisions, which generally are permanent). Meeting these budget constraints is key as it allows the Senate to pass the bill under reconciliation procedures, meaning that only a bare majority vote is required instead of the 60-vote threshold that typically applies, which in this case means without bipartisan support. As the Senate continues to be subject to these budgetary constraints, these “sunsets” generally made it into the Conference Committee’s reconciled version of the bill.
TAX RATES & KEY FIGURES
New Income Tax Rates & Brackets
To determine regular tax liability, an individual uses the appropriate tax rate schedule (or IRS-issued income tax tables for taxable income of less than $100,000). The Code provides four tax rate schedules for individuals based on filing status—i.e., single, married filing jointly/surviving spouse, married filing separately, and head of household—each of which is divided into income ranges which are taxed at progressively higher marginal tax rates as income increases. Under pre-Act law, individuals were subject to six tax rates: 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%.
New law. For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, seven tax rates apply for individuals: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. The Act also provides four tax rates for estates and trusts: 10%, 24%, 35%, and 37%. (Code Sec. 1(i), as amended by Act Sec. 11001) The specific application of these rates, and the income brackets at which they apply, is shown below.FOR MARRIED INDIVIDUALS FILING JOINT RETURNS AND SURVIVING SPOUSES: If taxable income is: The tax is: -------------------- ----------- Not over $19,050 10% of taxable income Over $19,050 but not $1,905 plus 12% of the over $77,400 excess over $19,050 Over $77,400 but not $8,907 plus 22% of the over $165,000 excess over $77,400 Over $165,000 but not $28,179 plus 24% of the over $315,000 excess over $165,000 Over $315,000 but not $64,179 plus 32% of the over $400,000 excess over $315,000 Over $400,000 but not $91,379 plus 35% of the over $600,000 excess over $400,000 Over $600,000 $161,379 plus 37% of the excess over $600,000 FOR SINGLE INDIVIDUALS (OTHER THAN HEADS OF HOUSEHOLDS AND SURVIVING SPOUSES): If taxable income is: The tax is: -------------------- ---------- Not over $9,525 10% of taxable income Over $9,525 but not $952.50 plus 12% of the over $38,700 excess over $9,525 Over $38,700 but not $4,453.50 plus 22% of the over $82,500 excess over $38,700 Over $82,500 but not $14,089.50 plus 24% of the over $157,500 excess over $82,500 Over $157,500 but not $32,089.50 plus 32% of the over $200,000 excess over $157,000 Over $200,000 but not $45,689.50 plus 35% of the over $500,000 excess over $200,000 Over $500,000 $150,689.50 plus 37% of the excess over $500,000 FOR HEADS OF HOUSEHOLDS: If taxable income is: The tax is: -------------------- ----------- Not over $13,600 10% of taxable income Over $13,600 but not $1,360 plus 12% of the over $51,800 excess over $13,600 Over $51,800 but not $5,944 plus 22% of the over $82,500 excess over $51,800 Over $82,500 but not $12,698 plus 24% of the over $157,500 excess over $82,500 Over $157,500 but not $30,698 plus 32% of the over $200,000 excess over $157,500 Over $200,000 but not $44,298 plus 35% of the over $500,000 excess over $200,000 Over $500,000 $149,298 plus 37% of the excess over $500,000 FOR MARRIEDS FILING SEPARATELY: If taxable income is: The tax is: -------------------- ---------- Not over $9,525 10% of taxable income Over $9,525 but not $952.50 plus 12% of the over $38,700 excess over $9,525 Over $38,700 but not $4,453.50 plus 22% of the over $82,500 excess over $38,700 Over $82,500 but not $14,089.50 plus 24% of the over $157,500 excess over $82,500 Over $157,500 but not $32,089.50 plus 32% of the over $200,000 excess over $157,500 Over $200,000 but not $45,689.50 plus 35% of the over $300,000 excess over $200,000 Over $300,000 $80,689.50 plus 37% of the excess over $300,000 FOR ESTATES AND TRUSTS: If taxable income is: The tax is: --------------------- ----------- Not over $2,550 10% of taxable income Over $2,550 but not $255 plus 24% of the over $9,150 excess over $2,550 Over $9,150 but not $1,839 plus 35% of the over $12,500 excess over $9,150 Over $12,500 $3,011.50 plus 37% of the excess over $12,500
Standard Deduction Increased
Taxpayers are allowed to reduce their adjusted gross income (AGI) by the standard deduction or the sum of itemized deductions to determine their taxable income. Under pre-Act law, for 2018, the standard deduction amounts, indexed to inflation, were to be: $6,500 for single individuals and married individuals filing separately; $9,550 for heads of household, and $13,000 for married individuals filing jointly (including surviving spouses). Additional standard deductions may be claimed by taxpayers who are elderly or blind.
New law. For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the standard deduction is increased to $24,000 for married individuals filing a joint return, $18,000 for head-of-household filers, and $12,000 for all other taxpayers, adjusted for inflation in tax years beginning after 2018. No changes are made to the current-law additional standard deduction for the elderly and blind. (Code Sec. 63(c)(7), as added by Act Sec. 11021(a))
Personal Exemptions Suspended
Under pre-Act law, taxpayers determined their taxable income by subtracting from their adjusted gross income any personal exemption deductions. Personal exemptions generally were allowed for the taxpayer, the taxpayer’s spouse, and any dependents. The amount deductible for each personal exemption was scheduled to be $4,150 for 2018, subject to a phaseout for higher earners.
New law.For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the deduction for personal exemptions is effectively suspended by reducing the exemption amount to zero. (Code Sec. 151(d), as modified by Act Sec. 11041(a)) A number of corresponding changes are made throughout the Code where specific provisions contain references to the personal exemption amount in Code Sec. 151(d), and in each of these instances, the dollar amount to be used is $4,150, as adjusted by inflation. These include Code Sec. 642(b)(2)(C) (exemption deduction for qualified disability trusts), Code Sec. 3402 (wage withholding, subject to an exception below for 2018), and Code Sec. 6334(d) (property exempt from levy).
Withholding rules. The Conference Agreement specifies that IRS may administer the withholding rules under Code Sec. 3402 for tax years beginning before Jan. 1, 2019 without regard to the above amendments—i.e., wage withholding rules may remain the same as present law for 2018. (Act Sec. 11041(f)(2))
New Measure of Inflation Provided
Tax bracket amounts, standard deduction amounts, personal exemptions, and various other tax figures are annually adjusted to reflect inflation. Under pre-Act law, the measure of inflation was CPI-U (Consumer Price Index for all urban customers).
New law. For tax years beginning after Dec. 31, 2017 (Dec. 31, 2018 for figures that are newly provided under the Act for 2018 and thus won’t be reset until after that year, e.g., the tax brackets set out above), dollar amounts that were previously indexed using CPI-U will instead be indexed using chained CPI-U (C-CPI-U). (Code Sec. 1(f), as amended by Act Sec. 11002(a)) This change, unlike many provisions in the Act, is permanent.RIA observation: In general, chained CPI grows at a slower pace than CPI-U because it takes into account a consumer’s ability to substitute between goods in response to changes in relative prices. Proponents for the use of chained CPI say that CPI-U overstates increases in the cost of living because it doesn’t take into account the fact that consumers generally adjust their buying patterns when prices go up, rather than simply buying an item at a higher price.
Kiddie Tax Modified
Under pre-Act law, under the “kiddie tax” provisions, the net unearned income of a child was taxed at the parents’ tax rates if the parents’ tax rates was higher than the tax rates of the child. The remainder of a child’s taxable income (i.e., earned income, plus unearned income up to $2,100 (for 2018), less the child’s standard deduction) was taxed at the child’s rates. The kiddie tax applied to a child if:
- The child had not reached the age of 19 by the close of the tax year, or the child was a full-time student under the age of 24, and either of the child’s parents was alive at such time;
- The child’s unearned income exceeded $2,100 (for 2018); and
- The child did not file a joint return.
New law. For tax years beginning after Dec. 31, 2017, the taxable income of a child attributable to earned income is taxed under the rates for single individuals, and taxable income of a child attributable to net unearned income is taxed according to the brackets applicable to trusts and estates (see above). This rule applies to the child’s ordinary income and his or her income taxed at preferential rates. (Code Sec. 1(j)(4), as amended by Act Sec. 11001(a))
Capital Gains Provisions Conformed
The adjusted net capital gain of a noncorporate taxpayer (e.g., an individual) is taxed at maximum rates of 0%, 15%, or 20%.
Under pre-Act law, the 0% capital gain rate applied to adjusted net capital gain that otherwise would be taxed at a regular tax rate below the 25% rate (i.e., at the 10% or 15% ordinary income tax rates); the 15% capital gain rate applied to adjusted net capital gain in excess of the amount taxed at the 0% rate, that otherwise would be taxed at a regular tax rate below the 39.6% (i.e., at the 25%, 28%, 33% or 35% ordinary income tax rates); and the 20% capital gain rate applied to adjusted net capital gain that exceeded the amounts taxed at the 0% and 15% rates.
New law. The Act generally retains present-law maximum rates on net capital gains and qualified dividends. It retains the breakpoints that exist under pre-Act law, but indexes them for inflation using C-CPI-U in tax years after Dec. 31, 2017. (Code Sec. 1(j)(5)(A), as amended by Act Sec. 11001(a))
For 2018, the 15% breakpoint is: $77,200 for joint returns and surviving spouses (half this amount for married taxpayers filing separately), $51,700 for heads of household, $2,600 for trusts and estates, and $38,600 for other unmarried individuals. The 20% breakpoint is $479,000 for joint returns and surviving spouses (half this amount for married taxpayers filing separately), $452,400 for heads of household, $12,700 for estates and trusts, and $425,800 for other unmarried individuals. (Code Sec. 1(h)(1), as amended by Act Sec. 11001(a)(5))
New Holding Period Requirement
In general, the receipt of a capital interest for services provided to a partnership results in taxable compensation for the recipient. However, under a safe harbor rule, the receipt of a profits interest in exchange for services provided is not a taxable event to the recipient if the profits interest entitles the holder to share only in gains and profits generated after the date of issuance (and certain other requirements are met).
Typically, hedge fund managers guide the investment strategy and act as general partners to an investment partnership, while outside investors act as limited partners. Fund managers are compensated in two ways. First, to the extent that they invest their own capital in the funds, they share in the appreciation of fund assets. Second, they charge the outside investors two kinds of annual “performance” fees: a percentage of total fund assets, typically 2%, and a percentage of the fund’s earnings, typically 20%, respectively. The 20% profits interest is often carried over from year to year until a cash payment is made, usually following the closing out of an investment. This is called a “carried interest”.
Under pre-Act law, carried interests were taxed in the hands of the taxpayer (i.e., the fund manager) at favorable capital gain rates instead of as ordinary income.
New law. Effective for tax years beginning after Dec. 31, 2017, the Act effectively imposes a 3-year holding period requirement in order for certain partnership interests received in connection with the performance of services to be taxed as long-term capital gain. (Code Sec. 1061, “Partnership Interests Held in Connection with Performance of Services”, added by Act Sec. 13309(a)) If the 3-year holding period is not met with respect to an applicable partnership interest held by the taxpayer, the taxpayer’s gain will be treated as short-term gain taxed at ordinary income rates. (Code Sec. 1061(a))
New Limitations on “Excess Business Loss”
In general, the passive loss rules under Code Sec. 469 limit deductions and credits from passive trade or business activities. The passive loss rules apply to individuals, estates and trusts, and closely held corporations. A passive activity for this purpose is a trade or business activity in which the taxpayer owns an interest but does not materially participate. “Material participation” means that the taxpayer is involved in the operation of the activity on a basis that is regular, continuous, and substantial. (Reg. § 1.469-5) Deductions attributable to passive activities, to the extent they exceed income from passive activities, generally may not be deducted against other income and are carried forward and treated as deductions and credits from passive activities in the next year.
Under pre-Act law, Code Sec. 469 provided a limitation on excess farm losses that applies to taxpayers other than C corporations. If a taxpayer other than a C corporation received an applicable subsidy for the tax year, the amount of the “excess farm loss” was not allowed for the tax year, and was carried forward and treated as a deduction attributable to farming businesses in the next tax year. An excess farm loss for a tax year meant the excess of aggregate deductions that were attributable to farming businesses over the sum of aggregate gross income or gain attributable to farming businesses plus the threshold amount. The threshold amount was the greater of
- $300,000 ($150,000 for married individuals filing separately), or
- For the 5-consecutive-year period preceding the tax year, the excess of the aggregate gross income or gain attributable to the taxpayer’s farming businesses over the aggregate deductions attributable to the taxpayer’s farming businesses.
New law. For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the Act provides that the excess farm loss limitation doesn’t apply, and instead a noncorporate taxpayer’s “excess business loss” is disallowed. Under the new rule, excess business losses are not allowed for the tax year but are instead carried forward and treated as part of the taxpayer’s net operating loss (NOL) carryforward in subsequent tax years. This limitation applies after the application of the passive loss rules described above. (Code Sec. 461(l), as added by Act Sec. 11012)
An excess business loss for the tax year is the excess of aggregate deductions of the taxpayer attributable to the taxpayer’s trades and businesses, over the sum of aggregate gross income or gain of the taxpayer plus a threshold amount. The threshold amount for a tax year is $500,000 for married individuals filing jointly, and $250,000 for other individuals, with both amounts indexed for inflation. (Code Sec. 461(l)(3), as added by Act Sec. 11012)
In the case of a partnership or S corporation, the provision applies at the partner or shareholder level. Each partner’s or S corporation shareholder’s share of items of income, gain, deduction, or loss of the partnership or S corporation is taken into account in applying the above limitation for the tax year of the partner or S corporation shareholder; and regulatory authority is provided to apply the new provision to any other passthrough entity to the extent necessary, as well as to require any additional reporting as IRS determines is appropriate to carry out the purposes of the provision. (Code Sec. 461(l)(4), as added by Act Sec. 11012(a))
Deduction for Personal Casualty & Theft Losses Suspended
Under pre-Act law, individual taxpayers were generally allowed to claim an itemized deduction for uncompensated personal casualty losses, including those arising from fire, storm, shipwreck, or other casualty, or from theft.
New law. For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the personal casualty and theft loss deduction is suspended, except for personal casualty losses incurred in a Federally-declared disaster. (Code Sec. 165(h)(5), as amended by Act Sec. 11044) However, where a taxpayer has personal casualty gains, the loss suspension doesn’t apply to the extent that such loss doesn’t exceed the gain.
Gambling Loss Limitation Modified
In general, taxpayers can claim a deduction for wagering losses to the extent of wagering winnings. (Code Sec. 165(d)) However, under pre-Act law, other deductions connected to wagering (e.g., transportation, admission fees) could be claimed regardless of wagering winnings.
New law. For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the limitation on wagering losses under Code Sec. 165(d) is modified to provide that all deductions for expenses incurred in carrying out wagering transactions, and not just gambling losses, are limited to the extent of gambling winnings. (Code Sec. 165(d), as amended by Act Sec. 11050)
CHANGES TO TAX CREDITS
Child Tax Credit Increased
Under pre-Act law, a taxpayer could claim a child tax credit of up to $1,000 per qualifying child under the age of 17. The aggregate amount of the credit that could be claimed phased out by $50 for each $1,000 of AGI over $75,000 for single filers, $110,000 for married filers, and $55,000 for married individuals filing separately. To the extent that the credit exceeded a taxpayer’s liability, a taxpayer was eligible for a refundable credit (i.e., the additional child tax credit) equal to 15% of earned income in excess of $3,000 (the “earned income threshold”). A taxpayer claiming the credit had to include a valid Taxpayer Identification Number (TIN) for each qualifying child on their return. In most cases, the TIN is the child’s Social Security Number (SSN), although Individual Taxpayer Identification Numbers (ITINs) were also accepted.
New law. For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the child tax credit is increased to $2,000, and other changes are made to phase-outs and refundability during this same period, as outlined below. (Code Sec. 24(h)(2), as added by Act Sec. 11022(a))
Phase-out. The income levels at which the credit phases out are increased to $400,000 for married taxpayers filing jointly ($200,000 for all other taxpayers) (not indexed for inflation). (Code Sec. 24(h)(3), as added by Act Sec. 11022(a))
Non-child dependents. In addition, a $500 nonrefundable credit is provided for certain non-child dependents. (Code Sec. 24(h)(4), as added by Act Sec. 11022(a))
Refundability. The amount of the credit that is refundable is increased to $1,400 per qualifying child, and this amount is indexed for inflation, up to the base $2,000 base credit amount. The earned income threshold for the refundable portion of the credit is decreased from $3,000 to $2,500. ((Code Sec. 24(h)(6), as added by Act Sec. 11022(a)))
SSN required. No credit will be allowed to a taxpayer with respect to any qualifying child unless the taxpayer provides the child’s SSN. (Code Sec. 24(h)(7), as added by Act Sec. 11022(a))
MODIFIED DEDUCTIONS & EXCLUSIONS
State and Local Tax Deduction Limited
Under pre-Act law, taxpayers could deduct from their taxable income as an itemized deduction several types of taxes paid at the state and local level, including real and personal property taxes, income taxes, and/or sales taxes.
New law. For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, subject to the exception described below, State, local, and foreign property taxes, and State and local sales taxes, are deductible only when paid or accrued in carrying on a trade or business or an activity described in Code Sec. 212 (generally, for the production of income). State and local income, war profits, and excess profits are not allowable as a deduction.
However, a taxpayer may claim an itemized deduction of up to $10,000 ($5,000 for a married taxpayer filing a separate return) for the aggregate of
- State and local property taxes not paid or accrued in carrying on a trade or business or activity described in Code Sec. 212; and
- State and local income, war profits, and excess profits taxes (or sales taxes in lieu of income, etc. taxes) paid or accrued in the tax year.
Foreign real property taxes may not be deducted. (Code Sec. 164(b)(6), as amended by Act Sec. 11042)Prepayment provision. For tax years beginning after Dec. 31, 2016, in the case of an amount paid in a tax year beginning before Jan. 1, 2018 with respect to a State or local income tax imposed for a tax year beginning after Dec. 31, 2017, the payment will be treated as paid on the last day of the tax year for which such tax is so imposed for purposes of applying the above limits. (Code Sec. 164(b)(6), as amended by Act Sec. 11042) In order words, a taxpayer who, in 2017, pays an income tax that is imposed for a tax year after 2017, can’t claim an itemized deduction in 2017 for that prepaid income tax.
Mortgage & Home Equity Indebtedness Interest Deduction Limited
Under pre-Act law, taxpayer could deduct as an itemized deduction qualified residence interest, which included interest paid on a mortgage secured by a principal residence or a second residence. The underlying mortgage loans could represent acquisition indebtedness of up to $1 million ($500,000 in the case of a married individual filing a separate return), plus home equity indebtedness of up to $100,000.
New law. For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the deduction for interest on home equity indebtedness is suspended, and the deduction for mortgage interest is limited to underlying indebtedness of up to $750,000 ($375,000 for married taxpayers filing separately). (Code Sec. 163(h)(3)(F), as amended by Act Sec. 11043(a)) For tax years after Dec. 31, 2025, the prior $1 million/$500,000 limitations are restored, and a taxpayer may treat up to these amounts as acquisition indebtedness regardless of when the indebtedness was incurred. The suspension for home equity indebtedness also ends for tax years beginning after Dec. 31, 2025.
Treatment of indebtedness incurred on or before Dec. 15, 2017. The new lower limit doesn’t apply to any acquisition indebtedness incurred before Dec. 15, 2017.
“Binding contract” exception. A taxpayer who has entered into a binding written contract before Dec. 15, 2017 to close on the purchase of a principal residence before Jan. 1, 2018, and who purchases such residence before Apr. 1, 2018, shall be considered to incur acquisition indebtedness prior to Dec. 15, 2017.
Refinancing. The $1 million/$500,000 limitations continue to apply to taxpayers who refinance existing qualified residence indebtedness that was incurred before Dec. 15, 2017, so long as the indebtedness resulting from the refinancing doesn’t exceed the amount of the refinanced indebtedness. (Code Sec. 163(h)(3)(F), as amended by Act Sec. 11043(a))
Medical Expense Deduction Threshold Temporarily Reduced
A deduction is allowed for the expenses paid during the tax year for the medical care of the taxpayer, the taxpayer’s spouse, and the taxpayer’s dependents to the extent the expenses exceed a threshold amount. To be deductible, the expenses may not be reimbursed by insurance or otherwise. If the medical expenses are reimbursed, then they must be reduced by the reimbursement before the threshold is applied. Under pre-Act law, the threshold was generally 10% of AGI.RIA observation:For tax years beginning after Dec. 31, 2012, and ending before Jan. 1, 2017, a 7.5%-of-AGI floor for medical expenses applied if a taxpayer or the taxpayer’s spouse had reached age 65 before the close of the tax year.
And, under pre-Act law, for alternative minimum tax (AMT) purposes, the medical expenses deduction rules were modified such that medical expenses were only deductible to the extent they exceeded 10% of AGI.
New law. For tax years beginning after Dec. 31, 2016 and ending before Jan. 1, 2019, the threshhold on medical expense deductions is reduced to 7.5% for all taxpayers. (Code Sec. 213(f), as amended by Act Sec. 11027(a))
In addition, the rule limiting the medical expense deduction for AMT purposes to 10% of AGI doesn’t apply to tax years beginning after Dec. 31, 2016 and ending before Jan. 1, 2019. (Code Sec. 56(b)(1)(B), as amended by Act Sec. 11027(b))
Charitable Contribution Deduction Limitation Increased
The deduction for an individual’s charitable contribution is limited to prescribed percentages of the taxpayer’s “contribution base”. Under pre-Act law, the applicable percentages were 50%, 30%, or 20%, and depended on the type of organization to which the contribution was made, whether the contribution was made “to” or merely “for the use of” the donee organization, and whether the contribution consisted of capital gain property. The 50% limitation applied to public charities and certain private foundations.
No charitable deduction is allowed for contributions of $250 or more unless the donor substantiates the contribution by a contemporaneous written acknowledgment (CWA) from the donee organization. Under Code Sec. 170(f)(8)(D), IRS is authorized to issue regs that exempt donors from this substantiation requirement if the donee organization files a return that contains the same required information; however, IRS has decided not to issue such donee reporting regs.
New law. For contributions made in tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the 50% limitation under Code Sec. 170(b) for cash contributions to public charities and certain private foundations is increased to 60%. (Code Sec. 170(b)(1)(G), as added by Act Sec. 11023) Contributions exceeding the 60% limitation are generally allowed to be carried forward and deducted for up to five years, subject to the later year’s ceiling.
And, for contributions made in tax years beginning after Dec. 31, 2016, the Code Sec. 170(f)(8)(D) provision—i.e., the donee-reporting exemption from the CWA requirement—is repealed. (Former Code Sec. 170(f)(8)(D), as stricken by Act Sec. 13705)
No Deduction For Amounts Paid For College Athletic Seating Rights
Under pre-Act law, special rules applied to certain payments to institutions of higher education in exchange for which the payor receives the right to purchase tickets or seating at an athletic event. The payor could treat 80% of a payment as a charitable contribution where:
- The amount was paid to or for the benefit of an institution of higher education (i.e., generally, a school with a regular faculty and curriculum and meeting certain other requirements); and
- Such amount would be allowable as a charitable deduction but for the fact that the taxpayer receives (directly or indirectly) as a result of the payment the right to purchase tickets for seating at an athletic event in an athletic stadium of such institution.
New law. For contributions made in tax years beginning after Dec. 31, 2017, no charitable deduction is allowed for any payment to an institution of higher education in exchange for which the payor receives the right to purchase tickets or seating at an athletic event. (Code Sec. 170(l), as amended by Act Sec. 13704)
Alimony Deduction by Payor/Inclusion by Payee Suspended
Under pre-Act law, alimony and separate maintenance payments were deductible by the payor spouse under Code Sec. 215(a) and includible in income by the recipient spouse under Code Sec. 71(a) and Code Sec. 61(a)(8).
New law. For any divorce or separation agreement executed after Dec. 31, 2018, or executed before that date but modified after it (if the modification expressly provides that the new amendments apply), alimony and separate maintenance payments are not deductible by the payor spouse and are not included in the income of the payee spouse. Rather, income used for alimony is taxed at the rates applicable to the payor spouse. (Former Code Secs. 215, 61(a)(8), and 71, as stricken by Act Sec. 11051)
Miscellaneous Itemized Deductions Suspended
Under pre-Act law, taxpayers were allowed to deduct certain miscellaneous itemized deductions to the extent they exceeded, in the aggregate, 2% of the taxpayer’s adjusted gross income.
New law. For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the deduction for miscellaneous itemized deductions that are subject to the 2% floor is suspended. (Code Sec. 67(g), as added by Act Sec. 11045)RIA observation:This includes the deduction for tax preparation expenses.
Overall Limitation (“Pease Limitation”) on Itemized Deductions Suspended
Under pre-Act law, higher-income taxpayers who itemized their deductions were subject to a limitation on these deductions (commonly known as the “Pease limitation”). For taxpayers who exceed the threshold, the otherwise allowable amount of itemized deductions was reduced by 3% of the amount of the taxpayers’ adjusted gross income exceeding the threshold. The total reduction couldn’t be greater than 80% of all itemized deductions, and certain itemized deductions were exempt from the Pease limitation.
New law. For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the “Pease limitation” on itemized deductions is suspended. (Code Sec. 68(f), as amended by Act Sec. 11046)
Qualified Bicycle Commuting Exclusion Suspended
Under pre-Act law, an employee was allowed to exclude up to $20 per month in qualified bicycle commuting reimbursements—i.e., any amount received from an employer during a 15-month period beginning with the first day of the calendar year as payment for reasonable expenses during a calendar year.
New law. For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the exclusion from gross income and wages for qualified bicycle commuting reimbursements is suspended.
(Code Sec. 132(f)(8), as added by Act Sec. 11047)
Exclusion for Moving Expense Reimbursements Suspended
Under pre-Act law, an employee could, under Code Sec. 3401(a)(15), Code Sec. 3121(a)(11), and Code Sec. 3306(b)(9), exclude qualified moving expense reimbursements from his or her gross income and from his or her wages for employment tax purposes. These were any amount received (directly or indirectly) from an employer as payment for (or reimbursement of) expenses which would be deductible as moving expenses under Code Sec. 217 if directly paid or incurred by the employee.
New law. For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the exclusion for qualified moving expense reimbursements is suspended, except for members of the Armed Forces on active duty (and their spouses and dependents) who move pursuant to a military order and incident to a permanent change of station. (Code Sec. 132(g), as amended by Act Sec. 11048)
Moving Expenses Deduction Suspended
Under pre-Act law, taxpayers could claim a deduction under Code Sec. 217 for moving expenses incurred in connection with starting a new job if the new workplace was at least 50 miles farther from a taxpayer’s former residence than the former place of work.
New law. For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the deduction for moving expenses is suspended, except for members of the Armed Forces on active duty who move pursuant to a military order and incident to a permanent change of station. (Code Sec. 217(k), as amended by Act Sec. 11049(a))
Deduction for Living Expenses of Members of Congress Eliminated
Individual taxpayers generally can, subject to certain limitations, deduct ordinary and necessary business expenses paid or incurred during the tax year in carrying on a trade or business, including expenses for travel away from home. Under pre-Act law, members of Congress were allowed to deduct up to $3,000 of living expenses when they were away from home (such as expenses connected with maintaining a residence in Washington, D.C.) in any tax year.
New law.For tax years beginning after the enactment date, members of Congress cannot deduct living expenses when they are away from home. (Code Sec. 162(a), as amended by Act Sec. 13311)
Combat Zone Treatment Extended to Egypt’s Sinai Peninsula
Members of the Armed Forces serving in a combat zone are afforded a number of tax benefits e.g., exclusion of certain pay and special estate tax rules.
New law.For purposes of various Code provisions that provide tax benefits to members of the Armed Forces serving in a combat zone, the Act provides that a “qualified hazardous duty area” (which the Act defines as the Sinai Peninsula of Egypt) is treated in the same manner as a combat zone. Thus, under the Act, for services provided on or after June 9, 2015, combat zone tax benefits are, except as provided below, granted for the Sinai Peninsula of Egypt, if, as of the enactment date, any member of the U.S. Armed Forces is entitled to special pay under section 310 of title 37, United States Code (relating to special pay; duty subject to hostile fire or imminent danger), for services performed in such location. This benefit lasts only during the period such entitlement is in effect.
However, the combat zone benefit under Code Sec. 3401(a)(1) relating to the withholding exemption for combat pay applies to remuneration paid after the date of enactment. (Act Sec. 11026(d))
Repeal of Obamacare Individual Mandate
Under pre-Act law, the Affordable Care Act (also called the ACA or Obamacare) required that individuals who were not covered by a health plan that provided at least minimum essential coverage were required to pay a “shared responsibility payment” (also referred to as a penalty) with their federal tax return. Unless an exception applied, the tax was imposed for any month that an individual did not have minimum essential coverage.
New law.For months beginning after Dec. 31, 2018, the amount of the individual shared responsibility payment is reduced to zero. (Code Sec. 5000A(c), as amended by Act Sec. 11081) This repeal is permanent.RIA observation:According to the Congressional Budget Office (CBO), reducing the penalty to zero would raise approximately $338 billion over the 10-year budgetary window period because, when no longer penalized for not doing so, fewer people would obtain subsidized coverage.RIA observation: The Act leaves intact the 3.8% net investment income tax and the 0.9% additional Medicare tax, both enacted by Obamacare.
ALTERNATIVE MINIMUM TAX (AMT)
AMT Retained, with Higher Exemption Amounts
The alternative minimum tax (AMT) is a tax system separate from the regular tax that is intended to prevent a taxpayer with substantial income from avoiding tax liability by using various exclusions, deductions, and credits. Under it, AMT rates are applied to AMT income determined after the taxpayer “gives back” an assortment of tax benefits. If the tax determined under these calculations exceeds the regular tax, the larger amount is owed.
In computing the AMT, only alternative minimum taxable income (AMTI) above an AMT exemption amount is taken into account. The AMT exemption amount is set by statute and adjusted annually for inflation, and the exemption amounts are phased out at higher income levels.
Under pre-Act law, for 2018, the exemption amounts were scheduled to be:
- $86,200 for marrieds filing jointly/surviving spouses;
- $55,400 for other unmarried individuals;
- 50% of the marrieds-filing-jointly amount for marrieds filing separately, i.e., $43,100;
And, those exemption amounts were reduced by an amount equal to 25% of the amount by which the individual’s AMTI exceeded:
- $164,100 for marrieds filing jointly and surviving spouses (phase-out complete at $508,900);
- $123,100 for unmarried individuals (phase-out complete at $344,700); and
- $50% of the marrieds-filing-jointly amount for marrieds filing separately, i.e., $82,050 (phase-out complete at $254,450).
Additionally, married persons filing must add the lesser of the following to AMTI:
- 25% of the excess of AMTI (determined without regard to this adjustment) over the minimum amount of income at which the exemption will be completely phased out, or
- The exemption amount.
So, for 2018, a married person filing separately would have had to add the lessor of the following to AMTI:
- 25% of the excess of AMTI over $254,450, or $43,100.
This is referred to as the “25% less-of add-back” and it is intended to prevent an incentive for married persons to file separately.
For trusts and estates, for 2018, the exempt amount was scheduled to be $24,600, and the exemption was to be reduced by 25% of the amount by which its AMTI exceeded $82,050 (phase-out complete at $254,450).
New law. For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the Act increases the AMT exemption amounts for individuals as follows:
- For joint returns and surviving spouses, $109,400.
- For single taxpayers, $70,300.
- For marrieds filing separately, $54,700. (Code Sec. 55(d)(4), as amended by Act Sec. 12003(a))
Under the Act, the above exemption amounts are reduced (not below zero) to an amount equal to 25% of the amount by which the alternative taxable income of the taxpayer exceeds the phase-out amounts, increased as follows:
- For joint returns and surviving spouses, $1 million.
- For all other taxpayers (other than estates and trusts), $500,000.
For trusts and estates, the base figure of $22,500 and phase-out amount of $75,000 remain unchanged. All of these amounts will be adjusted for inflation after 2018 under the new C-CPI-U inflation measure (see above). (Code Sec. 55(d)(4), as amended by Act Sec. 12003(a))
ABLE Account Changes
ABLE Accounts under Code Sec. 529A provide individuals with disabilities and their families the ability to fund a tax preferred savings account to pay for “qualified” disability related expenses. Contributions may be made by the person with a disability (the “designated beneficiary”), parents, family members or others. Under pre-Act law, the annual limitation on contributions is the amount of the annual gift-tax exemption ($15,000 in 2018).
New law. Effective for tax years beginning after the enactment date and before Jan. 1, 2026, the contribution limitation to ABLE accounts with respect to contributions made by the designated beneficiary is increased, and other changes are in effect as described below. After the overall limitation on contributions is reached (i.e., the annual gift tax exemption amount; for 2018, $15,000), an ABLE account’s designated beneficiary can contribute an additional amount, up to the lesser of
- The Federal poverty line for a one-person household; or
- The individual’s compensation for the tax year. (Code Sec. 529A(b), as amended by Act Sec. 11024(a))
Saver’s credit eligible. Additionally, the designated beneficiary of an ABLE account can claim the saver’s credit under Code Sec. 25B for contributions made to his or her ABLE account. (Code Sec. 25B(d)(1), as amended by Act Sec. 11024(b))
Recordkeeping requirements. The Act also requires that a designated beneficiary (or person acting on the beneficiary’s behalf) maintain adequate records for ensuring compliance with the above limitations. (Code Sec. 529A(b)(2), as amended by Act Sec. 11024(a))
For distributions after the date of enactment, amounts from qualified tuition programs (QTPs, also known as 529 accounts; see below) are allowed to be rolled over to an ABLE account without penalty, provided that the ABLE account is owned by the designated beneficiary of that 529 account, or a member of such designated beneficiary’s family. (Code Sec. 529(c)(3), as amended by Act Sec. 11025) Such rolled-over amounts are counted towards the overall limitation on amounts that can be contributed to an ABLE account within a tax year, and any amount rolled over in excess of this limitation is includible in the gross income of the distributee.
Expanded Use of 529 Account Funds
Under pre-Act law, funds in a Code Sec. 529 college savings account could only be used for qualified higher education expenses. If funds were withdrawn from the account for other purposes, each withdrawal was treated as containing a pro-rata portion of earnings and principal. The earnings portion of a nonqualified withdrawal was taxable as ordinary income and subject to a 10% additional tax unless an exception applied.
“Qualified higher education expenses” included tuition, fees, books, supplies, and required equipment, as well as reasonable room and board if the student was enrolled at least half-time. Eligible schools included colleges, universities, vocational schools, or other postsecondary schools eligible to participate in a student aid program of the Department of Education. This included nearly all accredited public, nonprofit, and proprietary (for-profit) postsecondary institutions.
New law. For distributions after Dec. 31, 2017, “qualified higher education expenses” include tuition at an elementary or secondary public, private, or religious school, and various expenses associated with home school, up to a $10,000 limit per tax year. (Code Sec. 529(c)(7), as added by Act Sec. 11032(a))
Student Loan Discharged on Death Or Disability
Gross income generally includes the discharge of indebtedness of the taxpayer. Under an exception to this general rule, gross income does not include any amount from the forgiveness (in whole or in part) of certain student loans, if the forgiveness is contingent on the student’s working for a certain period of time in certain professions for any of a broad class of employers.
New law. For discharges of indebtedness after Dec. 31, 2017 and before Jan. 1, 2026, certain student loans that are discharged on account of death or total and permanent disability of the student are also excluded from gross income. (Code Sec. 108(f), as amended by Act Sec. 11031)
New Deferral Election for Qualified Equity Grants
Code Sec. 83 governs the amount and timing of income inclusion for property, including employer stock, transferred to an employee in connection with the performance of services. Under Code Sec. 83(a), an employee must generally recognize income for the tax year in which the employee’s right to the stock is transferable or isn’t subject to a substantial risk of forfeiture. The amount includible in income is the excess of the stock’s fair market value at the time of substantial vesting over the amount, if any, paid by the employee for the stock.
New law.Generally effective with respect to stock attributable to options exercised or restricted stock units (RSUs) settled after Dec. 31, 2017 (subject to a transition rule; see below), a qualified employee can elect to defer, for income tax purposes, recognition of the amount of income attributable to qualified stock transferred to the employee by the employer. (Code Sec. 83(i), as amended by Act Sec. 13603(a)) The election applies only for income tax purposes; the application of FICA and FUTA is not affected.
The election must be made no later than 30 days after the first time the employee’s right to the stock is substantially vested or is transferable, whichever occurs earlier. (Code Sec. 83(i)(4)(A), as added by Act Sec. 13603(a)) If the election is made, the income has to be included in the employee’s income for the tax year that includes the earliest of:
- The first date the qualified stock becomes transferable, including, solely for this purpose, transferable to the employer.
- The date the employee first becomes an “excluded employee” (i.e., an individual:
- Who is one-percent owner of the corporation at any time during the 10 preceding calendar years;
- Who is, or has been at any prior time, the chief executive officer or chief financial officer of the corporation or an individual acting in either capacity;
- Who is a family member of an individual described in (a) or (b); or
- Who has been one of the four highest compensated officers of the corporation for any of the 10 preceding tax years.
- The first date on which any stock of the employer becomes readily tradable on an established securities market;
- The date five years after the first date the employee’s right to the stock becomes substantially vested; or
- The date on which the employee revokes his or her election. (Code Sec. 83(i)(1)(B), as amended by Act Sec. 13603(a))
The election is available for “qualified stock” (defined in Code Sec. 83(i)(2)(A), as amended by Act Sec. 13603(a)) attributable to a statutory option. In such a case, the option is not treated as a statutory option, and the rules relating to statutory options and related stock do not apply. In addition, an arrangement under which an employee may receive qualified stock is not treated as a nonqualified deferred compensation plan solely because of an employee’s inclusion deferral election or ability to make the election.
Deferred income inclusion also applies for purposes of the employer’s deduction of the amount of income attributable to the qualified stock. That is, if an employee makes the election, the employer’s deduction is deferred until the employer’s tax year in which or with which ends the tax year of the employee for which the amount is included in the employee’s income as described in (1) – (5) above.
The new election applies for qualified stock of an eligible corporation. A corporation is treated as such for a tax year if:
- No stock of the employer corporation (or any predecessor) is readily tradable on an established securities market during any preceding calendar year, and
- The corporation has a written plan under which, in the calendar year, not less than 80% of all employees who provide services to the corporation