Form 1040 (Income Tax)

Personal Taxes, from 2018 until 2026

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This is a continuation of our discussion of the final versions of the House and Senate Tax Cuts and Jobs Act (sic) bill. Those are now the law of the land, PL 115-97.

Child Credit

Currently (in 2017, to be filed no later than 17 April 2017), the child tax credit applies to those whose taxable income is below $ 75K (singles, but $ 115K for marrieds). Once the $ 75K limit is reached, the credit is reduced by $ 50 for each $ 1K of additional income, which means the credit is gone completely for those with taxable incomes of $ 95K ($135K for married).

The current credit is $ 1000 [and can actually be a refund if one’s tax liability is low (to the tune of 15% of earned income in excess of $ 3000)]. The credit has been increased to $ 2000 (the Senate’s chosen value) under PL 115-97. And, the phase out limit will be raised to $200 K (or $400K for marrieds), again the Senate chosen values. There also is a $ 500 tax credit for each non-child dependent added to the mix. (Again, the Senate version was the final choice.)

Importantly, the tax credit is refundable up to $ 1400 (with phaseouts). This Senate provision (the one that prevailed) means that even if no tax is owed, the taxpayer(s) can receive a tax credit for their children.

So, from 2018 through 2016, a family of four would be entitled to $3800 in tax credits (maximum), as opposed to $ 2000 under the current law. This could ease the problem developed by removing personal exemptions (roughly $4050 per person) and changing the standard deduction ($12000) to $ 24000. The $ 4200 of additional taxable income, assuming all the credits are earned, could be counterbalanced by the new tax credit.

Special Credits

For those over 65 who were entitled to credits ($5K for singles, $7.5K for marrieds) on their retirement or disability payments will no longer receive that 15% tax credit on those funds.

Nor will there be an adoption credit ($ 13,750), or private activity bond credits. (While this wasn’t a credit, the funds used by employers who helped pay for adoptions by their staff will now be taxable income to the employee.)

The education benefits (with a plethora of different names and provisions) shall be coalesced into one credit. The new version of the education credit will be 100% tax credit for the first $ 2K of qualified expenses and 25% for the next $ 2K.

Coverdell Savings Accounts that could cover some educational expenses would no longer be allowed. Oh, sure, they would remain in force- but you can’t add any money to them. And, you can roll them over into 529 or ABLE plans. What PL 115-97 has really done is make 529’s more like the terminated Coverdells, since 529 plans can now be used for elementary and high school educations (up to $10K of tuition is covered), as would be apprenticeship program tuitions. And, unborn children can be beneficiaries, now. (Gotta love it when we worry more about the unborn- since they are abandoned once those fetuses take their first breaths.)

When student debt is forgiven by the lender, that amount had been charged as income to the taxpayer. Under PL 115-97, there will be a slight break. Disabled taxpayers who get the debt forgiven or folks who die and have the debt forgiven will have no tax consequences. (Yes- that really was the law of the land in 2017 and prior years!)

Interest on student debt payments went with the Senate version- which limits interest at $ 2500. (The House would not have allowed student loan interest to be deductible.) And, for lower-income ($ 65K for singles and $ 135K for married) taxpayers, this benefit begins phasing out; it’s gone completely when one’s income exceeds $ 80K ($ 165K for married couples).

And, the electric car credit has NOT been terminated. (Admittedly, both Tesla and GM are reaching the maximum credit levels [200K cars sold] under the program. Which really means this will be a boon to Chinese owned Volvo and German owned Volkswagen, not to American car manufacturers.) The last minute change recognized an important fact. When the Georgia state credit expired, electric car sales dropped from 1400 a month to barely 100. Extending this lost credit scenario to the whole US meant that car manufacturers will, at least for a short time, will not lose even more money per car (since some states mandate a set number of electric vehicles to be sold). Right now, it seems Tesla is losing a ton on each car (with investment included, the total loss per car is more than $ 50K) and GM is losing $ 9K per Volt sold. Not a good foreboding for zero emissions vehicles. [By the way, coal won’t work for car propulsion (unless it’s converted to natural gas or some other fuel type).]

Itemized Deductions (Schedule A)

The biggest change for itemized deductions is the removal of limitation on itemized deductions for those making more money. Right now (until you file your 2017 taxes by 17 April), there is a throttling of allowable itemized deductions when one made $ 261,500 (or $313,800 for marrieds). Under the new law, that limit totally disappears. (But, there are changes to the various components of the deductions, as we’ll see below.)

SALT (state and local tax deductions)
This chart will be dramatically changed over the next five years

We can also deduct mortgage interest now as long as our total indebtedness is under $ 1 KKK. That will continue to be allowed*, but any interest on NEW debt (assuming there is no other mortgage debt) will be subjected to a $ 750K (total) mortgage indebtedness limit. (Guess what? Only one home mortgage interest will be deductible, now. No NEW second homes or vacation homes. Which is why I used an asterisk (allowed*) about the current situation that may be maintainable.)

Oh, and property taxes? They’ll only be deductible up to $ 10K a year. And, no property taxes on foreign property will be deductible, either. Sorry Californians and New Yorkers (among other high property tax locales). Moreover, while only 2.5% of Americans have (or may need) mortgages in excess of $500K, the bulk of those folks live in California, New Jersey, and New York- and the cities of Boston (MA) and Washington (DC). You know- the places that don’t generally vote for the GOP.

(As a result of this targeted hit, many states are considering suing the federal government over these changes. (I don’t think they will have much success, by the way.) But, at least as many are getting creative. They are planning to incorporate an employer payroll tax that will replace the state income taxes. (A payroll tax would be deductible under the law. State income taxes are not deductible.) Others are considering allowing payments to the state government to be charitable deductions. [That means there would be no SALT limitation; those payments would be allowed as charitable deductions!])

Theft and personal casualty losses- unless one lives in a certified disaster zone- would no longer be deductible from one’s income, either.

Deductions for charity would no longer be limited to 50% of one’s adjusted gross income- that limit has been raised to 60%. Except, this means you need more than $ 24K of itemized deductions (between SALT, mortgage interest, medical, and charity) to begin itemizing. And, the gimmick about buying college athletic tickets and deducting the cost as a charitable donation- poof! It’s gone.

Nor will we be able to deduct the cost of tax preparation. That’s really not a big loss, since it had already been limited by the fact that there was a 2% threshold. (Only the costs that exceed 2% of one’s income were deductible.) The same rule – non-dedductibility- will also apply for expenses one incurs (and that are not reimbursed) due to one’s employment. (In particular, this was where most union members deducted their dues.) These were also deductible above the 2% threshold. (Actually, the tax prep AND non-reimbursed employee expenses were added together to determine that 2% threshold.)

As stated above, medical expenses that exceed 7.5% of our adjusted gross income (with the threshold rising to 10% in 2019 and subsequent years) would also no longer be deductible. Oh, another thing. The payments made to Medical Savings Accounts would no longer be deductible. And, employer contributions to such accounts (MSA) would now be considered taxable income. (It was deductible for the employer, but not taxable to the recipient; the MSA’s let employers provide high deductible health insurance and use the MSA to cover the out-of-pocket expenses for their employees.) Only Health Savings Accounts are now allowed. (Existing balances on an MSA are allowed to be rolled over into an HSA.)

The medical expense deduction was added back in because our elected officials were finally convinced how badly this would penalize seniors in a big way. Considering that almost 1/2 of those deducting medical expenses have family incomes under $ 50K (69% earn $ 75K or less), this was finally recognized as too big a hit to the lower middle class and senior citizens of the US.

Alimony and Moving

This specific provision is going to make divorce settlements a lot harder to achieve. But, at least, they extended the deadline that obtained in their proposed bills. Originally, anyone getting divorced after CY 2017 would no longer be able to deduct the cost of alimony from one’s income nor could those funds be taxable income to the recipient. But, that provision has been extended a year. So, if you get divorced in 2019 or later, alimony won’t be deductible for the payer or taxable to the recipient.

And, moving expenses will no longer reduce one’s income. These costs will no longer be deductible. Worse yet- if the employer pays for the move to a new location (where they want you to be working), it is now taxable income to the employee!

Homes and Housing

Excluding the costs for employer provided housing would now be limited to $ 50K a year- but only if your earned income is $120K or less. The benefit will be phased out at the rate of 50 cents on the dollar for each dollar of earned income that exceeds $ 120K. Assuming one’s income were $220K or more, the deduction would be totally disallowed and taxable to the recipient.

Sold home

Selling our homes will become more expensive, too. Right now, we can exclude $ 500K (married; half that for singles) of the gains on the sale of our homes from our taxable income- as long as this house was our primary residence for 2 of the past 5 years. The rule would become 5 of the past 8 years- and the capital gains exclusion would be limited in use to once every 5 years! Oh, it gets worse. That capital gains exclusion would be limited by $1 for every dollar of taxable income above $ 500K. (Singles currently get $ 250K- and the benefit will be erased as their income exceeds $ 250K, dollar for dollar.)

Pensions and Estates

No longer can one recharacterize payment to a traditional IRA or a Roth IRA. Once a conversion has been done, it’s done. No more gaming the system. (Yes, that’s a good thing- from a policy point of view.)

The Estate Tax exclusion now more than doubles from $ 5 million to $ 11.2 million in 2018 (and be indexed for inflation, a system that used to obtain, but hasn’t been used lately).

Alternative Minimum Tax (AMT)

The alternative minimum tax is not repealed, as the House Version obtained. (This is a special tax on the middle class and a portion of the upper middle class. (The top 2% are exempt from having it apply to their income.)

AMT, Form 6251

As originally enacted years ago, the AMT tax provision was supposed to apply primarily to the rich, but hit the middle class more than any other group of taxpayers.

Other Provisions

Now you can see that this law means HOW we make our money is going to be a lot more critical than HOW MUCH money we make. It no longer means that everyone with the same adjusted gross income will be paying the same amount of tax. How one makes it- via a pass-through business, via dividends, or via wages (in increasing order of taxes required) will set the taxes due.

The final bill keeps the provision costing colleges with “extravagant” investments an excise tax. The final version included a 1.4% tax on earnings accrued to various investments of private colleges. (I will be discussing the current GOP bias against colleges [whom they consider too liberal for their tastes] in a coming post.)

But, this provision will not apply to all private colleges. Just those that have amassed endowments that exceed $ 250K per registered student. That attacks some 60 to 70 universities, including Harvard, Princeton, Stanford, and Grinnell.

I can tell you that many of the colleges claim these endowments are critical to maintain funds for salaries, research, and financial aids. Other schools have problems dispensing part of their endowments because donors have stipulated restricted use on some of the funds they receive- and it takes more time to use the funds to comply with those demands.

For example, the last school mentioned above. Grinnell is a teeny school. 1700 undergrads tucked away in Iowa. And, they provide 90% of their students with financial aid, to the tune of $ 50 million a year. But, then, again, Grinnell has a $ 1.6 billion endowment. That’s 32 years of the annual scholarship needs. And, this tax will yank something on the order of $ 1.5 million from Grinnell to the US Treasury.

Yeah, you can see that I am still not really crying about this part of the proposed tax provision. But, as I stated above, this provision reflects the bias behind this bill. Most of the affected colleges are considered “liberal”. Which makes them cannon fodder for the authors of tax bill. (You do recall that these passed with not ONE vote from the Democratic party members.)

The provision to tax student tuition grants (which primarily affected graduate STEM [science, technology, engineering, and math] programs has been removed. These folks- 65% of US graduate students- can continue to receive these benefits on a tax-free basis.

OK. Now, all that we have left to discuss are the changes to business taxation. That’s scheduled for Monday.

Have a great weekend!

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