TAX CUTS & JOBS ACT
BILL LEONARD
[email protected]
718.544.1929 718.544.1540
137-34 71st Avenue, Flushing, NY 11367
TAX CUTS and JOBS ACT
presented
by
WILLIAM LEONARD, CPA, MAFF, CGMA
TABLE OF CONTENTS
TOPIC PAGE(S)
Introduction: Charts and Analysis 1- 4
Individual Tax Changes 6-51
Estate and Gift Tax 52-53
Accounting Methods 54-57
Depreciation and Section 179 58-67
General Business Items 68-77
Pass-Through Entity Deduction 78-93
Entity Choice Considerations 94-119
What’s New for 2017 120-138
POWER POINT SLIDE PRESENTATION 140-217
Introduction
Item Expired Extended Repealed Still in Comments
12/31/2016 by Act by Act effect-
Adoption assistance X Unmodified Repealed
programs X X X by Act for divorces
after
Alimony-Deduction X X X X 12/31/18
and Income X X Repealed
X X
AMT-C X X Increased
Corporations X exemption
AMT-Individuals X
X Rate 100%,
Alternative used after
refueling property 9/27/17
credit YES-STILL
Blind/Elderly HERE
additional standard
deduction Now $25
Bonus depreciation million
threshold
Business Repealed
Insurance Mandate 12/31/17
Capital gains rates except
Cash Method of disaster
Accounting area
Doubled
Casualty losses
Repealed
Child <17 Credit 12/31/17
COD exclusion on
principal residence 21% flat
Commuter car,
bicycle, transit >17
pass fringe benefit
C Corp tax rate Repealed
Coverdell Savings 12/31/17
Dependent Care
Assistance Fringe
Dependent Credit-
$500 New
Domestic
Production Activity
(Sec. 199)
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Introduction
Item Expired Extended Repealed Still in Comments
12/31/2016 by Act by Act effect-
Educ. Assist Fringe Unmodified No change
Electric car credit X X X by Act
Energy Efficient X Repealed
New Home Credit X X X X Repealed
Entertainment X 12/31/17
Employee X New credit
Business X X
Expenses X X Repealed
Employer family X 12/31/17
leave credit Doubled
Equity interest X exemption
deduction for estate
Estate tax and gifts
New
Flow through entity deduction
20% deduction Repealed
12/31/17
Gambling losses Repealed
12/31/17
Gain on sale of Repealed
after 2018
principal residence
Increased
Geothermal heat
pump credit
Graduate student
tuition waivers
Home Equity
Interest deduction
Investment
Expenses
Individual
insurance mandate
Lifetime Learning
Credit
Luxury car
depreciation
Medical itemized X Reverts to
deduction 7.5% base
X for all
Medicare .9% X taxpayers
thru
Surtax 12/31/18
Misc 2% itemized Repealed
12/31/17
deductions
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Introduction
Item Expired Extended Repealed Still in Comments
12/31/2016 by Act by Act effect-
MIP deduction as X Unmodified Modified for
mortgage interest X X by Act new loans
Mortgage interest X X to $750k
deduction X X X limit
X X X Repealed
Moving expenses X X
X Repealed
Net Investment X X 12/31/17
Income 3.8% X Ended up
no change
surtax Ended up
no change
New markets tax
Repealed
credit 12/31/17
Personal Repealed
for some
Exemption renovations
No
Personal significant
changes
Residence Energy Doubled
Efficiency Credit Repealed if
revenues
Personal residence <$25 million
Doubled
gain exclusion
Personal residence
holding period
change
Race horse 3 year
life when 2 or
younger
Recharacterization
of IRA to Roth
conversion
Rehab credit
Retirement Plans
Section 179
Expense
Section 263A
addback to
inventory
Standard
Deduction
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Introduction
Expired Extended Repealed Still in Comments
12/31/2016 by Act by Act effect-
Unmodified Limited to
Item X X by Act $10,000
X annually,
State and local X no 2017
income, property prepayment
and sales tax X of income
tax
Student loan X
Not
interest renewed
Tax Preparation
Fees-Non
Business
Teacher’s $250
deduction
Tuition and Fees
Deduction
Turbo Tax
Software deduction
Work Opportunity
Credits
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This page is Intentionally Blank and to be used for notes.
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2017 Tax Cuts and Jobs Act-Rates, Brackets and Exemptions
Tax Brackets
NEW LAW IRC SECTION 1
Effective for tax years beginning after 12/31/2017 and before 1/1/2026
(Sec. 11001 of Act)
Comparison of Tax Brackets for Ordinary Income
(2018 Tax Year)
Single Filer
2018 Old Law 2018 New Tax Cuts and Jobs
Act
10% $0-$9,525 10% $0-$9,525
15% $9,525-$38,700 12% $9,525-$38,700
25% $38,700-$93,700 22% $38,700-$82,500
28% $93,700-$195,450 24% $82,500-$157,500
33% $195,450-$424,950 32% $157,500-$200,000
35% $424,950-$426,700 35% $200,000-$500,000
39.6% $426,700+ 37% $500,000+
Comparison of Tax Brackets for Ordinary Income
(2018 Tax Year)
Married Filing Jointly
2018 Old Law 2018 New Tax Cuts and Jobs
Act
.
10% $0-$19,050 10% $0-$19,050
15% $19,050-$77,400 12% $19,050-$77,400
25% $77,400-$156,150 22% $77,400-$165,000
28% $156,150-$237,950 24% $165,000-$315,000
33% $237,950-$424,950 32% $315,000-$400,000
35% $424,950-$480,050 35% $400,000-$600,000
39.6% $480,050+ 37% $600,000+
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2017 Tax Cuts and Jobs Act-Rates, Brackets and Exemptions
Actual 2018 Rates, Brackets and Amounts
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2017 Tax Cuts and Jobs Act-Rates, Brackets and Exemptions
Standard Deductions & Exemptions
Filing Status 2018 New Law 2018 Old Law 2018 2018 Old
Law
Standard Standard Personal
Personal
Deduction Deduction Exemption Exemption
Single $12,000 $6,500 $0 $4,150
$24,000 $13,000 $0 $8,300
MFJ/Surviving
$12,000 $6,500 $0 $4,150
Spouse $18,000 $9,550 $0 $4,150
MFS $1,600 Single $1,600 Single N/A N/A
$1,300 MFJ $1,300 MFJ
Head of
Household
Additional blind
or disabled or
over 65
• The IRS will switch to an inflation index known as the chained CPI. Chained CPI
is considered a more accurate measure, but rises somewhat more slowly than the
traditional CPI. That would mean bracket thresholds and tax credits, for example,
would rise more slowly. See Sec. 11002 of the Act.
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2017 Tax Cuts and Jobs Act-Rates, Brackets and Exemptions
2018 Income Tax Brackets and Rates under Final Tax bill
Tax Single Filers Married Filing Married, filing Head of
Rate
Jointly separately Household
10% Up to $9,525 Up to $19,050 Up to $9,525 Up to $13,600
12% $9,526 to $19,051 to $9,526 to $13,601 to
$38,700 $77,400 $38,700 $51,800
22% $38,701 to $77,401 to $38,701 to $51,801 to
$82,500 $165,000 $$82,500 $82,500
24% $82,501 to $165,001 to $82,501 to $82,501 to
$157,500 $315,000 $157,500 $157,500
32% $157,501 to $315,001 to $157,501 to $157,501 to
$200,000 $400,000 $200,000 $200,000
35% $200,001 to $400,001 to $200,001 to $200,001 to
$500,000 $600,000 $300,000 $500,000
37% $500,000+ $600,000+ $300,000+ $500,000+
• The standard deduction in 2018 will double to $12,000/$24,000 (single/married)
under the tax bill. The $4,150 personal exemption will be fully eliminated for 2018.
See Act Section 11021.
• The final bill does not phase out the benefit of the 12-percent bracket for taxpayers
with adjusted gross income in excess of $1,000,000 ($1,200,000 in the case of
married taxpayers filing jointly).
• Unearned income for children will be taxed at trust and estate rates.
• The Act generally retains the present-law maximum rates on net capital gain and
qualified dividends, retaining the existing breakpoints between the 0%, 15%, and
20% breakpoints (except that the breakpoints will be indexed using chained CPI.
• Beginning in 2018, the Act imposes an enhanced due diligence requirement upon
tax return preparers when determining eligibility to file as head of household. This
would be in addition to the enhanced due diligence requirement imposed by IRC
§ 6695(g) for determining the American opportunity tax credit, the earned income
tax credit, and the child tax credit. A $500 penalty would apply to each failure.
No guidance is provided on this and the IRS is instructed to issue more regulations.
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2017 Tax Cuts and Jobs Act-Rates, Brackets and Exemptions
COMMENTS AND CONCERNS
• The new bill keeps the seven different tax brackets, but does reduce most of the
brackets. Many of the lower tax brackets are widened, allowing lower taxes for all
income levels. Taxpayers in the lower end of the 32% and 35% bracket seem to
be the only groups that may be negatively affected by higher rates because of the
bracket expansion.
• The biggest bump in rates (10%) occurs between the 12% and 22% brackets. For
clients just a few thousand dollars of taxable income above $50,700 single and
$101,400 MFJ (counting standard deduction) look closely at IRA contributions,
HSA contributions, business expenses, etc. to knock them back down to a 12%
bracket.
• The lowest two tax brackets use income ranges that are almost identical to the
current-law brackets, just with a lower rate of 12% for the second bracket. Since
the median American household is currently in the 15% tax bracket, this should
have the desired effect of lower taxes for middle-income households.
• The Act directs the Secretary of the Treasury to create new withholding rules for
employers. Withholding is currently based upon the number of exemptions of the
taxpayer, plus the amount of the standard deduction. The Act states that the
Secretary may choose to continue current withholding rules through 2018. The IRS
has stated that it expects to issue new withholding tables in February.
• The marriage penalty has been eliminated except for the highest brackets.
• Head of household is less beneficial for higher income earners-essentially the
same as single except for the three lowest brackets.
• The doubling of the standard deduction combined with the reduction of itemized
deductions will eliminate itemized deductions for many Americans. About 70% of
Americans used the standard deduction in 2016, but it is hard to estimate the effect
for 2018. That change will be costly for many residents of high income states—
those with high state and local taxes, such as California, New Jersey, and New
York—who can no longer write off most of those payments.
• The new kiddie tax rules will make filing returns easier for children, but they may
see a higher tax amount. The key for 2018 is to have the kids make estimated
payments of they have unearned income causing >$1,000 in tax due. This
equates to >$10,000 of unearned income. Under old rules, kids received the first
$1,050 of unearned income for free, but it is now taxed at 10% from the first dollar!
Get ready to file a lot of returns for kids in 2019.
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2017 Tax Cuts and Jobs Act-Rates, Brackets and Exemptions
• Kid’s earned income is still taxed at single rates.
• The Coverdell ESSA for kids has now become the savings account of choice.
Annual deposits are allowed of $2,000, earnings are exempt from tax and the
money may be used for college, high school or elementary school, including
private schools. Go to www.tdameritrade.com
• Withdrawals from the account, if used for education expenses, are tax-free.
Coverdell ESA Q&A
A savings account that is set up to pay the
What is a Coverdell ESA? qualified education expenses of a
designated beneficiary
Where can I open a Coverdell ESA? At any US bank or IRS approved entity
Who can have a Coverdell ESA? Any beneficiary under 18 or with special
needs
Are contributions deductible? No
Are earnings taxed while in the ESA? No
Are withdrawals from the ESA subject to Only if the withdrawals are more than the
tax? beneficiary's qualified education expenses
for the year
What is the annual contribution limit per $2,000 per each beneficiary
designated beneficiary?
What if more than one Coverdell ESA has The annual contribution limit is $2,000 for
been opened for the same beneficiary? each beneficiary no matter how many
accounts exist for that beneficiary or how
many individuals contribute.
Can contributions of stock or bonds be Only cash contributions are allowed.
made to a Coverdell ESA?
When must contributions stop? No contributions may be made to a
beneficiary's account after they reach 18,
except for special needs beneficiaries.
Contributions to ESA’s must be in cash and must be paid to a qualified trustee, generally
any entity which qualifies as a normal IRA trustee, before the beneficiary reaches 18.
The balance in the account must be distributed by the earlier of the beneficiary’s: Reaching
age thirty (within thirty days); or death. Contributions may be made to both an ESA and a
529 plan in the same year for the same beneficiary.
There are two annual contribution limits. The annual $2,000 maximum contribution per
beneficiary (contributor limit), and the annual $2,000 each beneficiary may receive
(beneficiary limit) in his or her account.
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2017 Tax Cuts and Jobs Act-Rates, Brackets and Exemptions
• With capital gains rates for taxpayers still 0% when their tax bracket is 15% or less,
the amount of total taxable income without incurring capital gains tax is:
Filing Status Top of 12% rate Standard Taxable income
bracket deduction before capital
(plus >65/blind)
gains are taxed:
Single $38,700 $12,000 $50,700
Married-Joint $77,400 $24,000 $101,400
Head of Household $51,800 $18,000 $69,800
Married-Separate $38,700 $12,000 $50,700
If the only thing causing a taxpayer to have income greater than these amounts,
then only the excess amount of capital gains is taxed, at the 15% rate. When a
client is in this low capital gains rate bracket it might be a good planning idea to
sell the stock at a non-taxed gain (don’t forget state rates though), and then buy
them back at the market price to increase basis. The wash sale rules do not apply
to gains.
2018 Capital Gain Rates (12/2017 Tax Cuts and Jobs Act)
Then
If net capital gain is from: maximum
capital gains
rate is:
Collectibles 28%*
Gain on Qualified Small Business Stock Equal to the Section 1202 28%*
Exclusion
Un-recaptured Section 1250 Gain 25%*
Rate when taxpayer is in 37% personal bracket 20%*
Other gain & qualified dividends when the regular tax rate is higher 15%*
than 15%
Other gain & qualified dividends when the regular tax rate is 15% or 0%
lower (Single <$50,700, MFJ <$101,400 taxable after exemptions)
*Plus potential 3.8% NII surtax for incomes >$200,000 single, $250,000 married joint
Capital Gains Planning
Client Name: Filing Status: MFJ 2018
$77,400
Filing status: 12% tax rate bracket highest income limit 24,000
Plus Filing status standard deduction
Plus Additional Itemized deductions
Subtotal: maximum 0% capital gains taxable income limit
Less estimated taxable income
Equals amount of no-tax capital gains to recognize this year
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2017 Tax Cuts and Jobs Act-Rates, Brackets and Exemptions
Child and Family Credits
NEW LAW IRC SECTION 24
Effective for tax years beginning after 12/31/2017 and before 1/1/2026
(Sec. 11022 of Act)
• The law increases the child tax credit for dependent children under 17 to $2,000
per child. The child must have a Social Security number issued before the due
date for filing the return. If the child reaches 17 during the year no credit will apply.
• The refundable portion of the credit has increased to $1,400 per child.
• The provision temporarily lowers the earned income threshold for the refundable
child tax credit to $2,500 from $3,000. The refundable amount is 15% of earned
income in excess of $4,500 (2,500 + credit of 2,000), limited to a maximum
refundable amount of $1,400 per child.
• Once a child has reached age 17, as well as other dependents, qualify for a non-
refundable credit of $500 each, for which an SSN or ITIN is acceptable. Dependent
children <17 without an SSN still qualify for the non-refundable $500 credit. Thus,
$13,833 of earned income is required for the maximum refundable credit per child.
• The $500 other dependent credit is not available to the taxpayer or spouse.
• The credit is allowable against both the regular tax and alternative minimum tax.
• The credit begins to phase out for taxpayers with adjusted gross income in excess
of $400,000 (in the case of married taxpayers filing a joint return) and $200,000
(for all other taxpayers). These phaseout thresholds are not indexed for inflation.
o The old phaseouts were $75,000 for single individuals or heads of
households, $110,000 for married individuals filing joint returns, and
$55,000 for married individuals filing separate returns.
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2017 Tax Cuts and Jobs Act-Rates, Brackets and Exemptions
COMMENTS AND CONCERNS
• The child must either be your son, daughter, stepchild, foster child, brother, sister,
stepbrother, stepsister or a descendant of any of these individuals, which includes
your grandchild, niece or nephew. An adopted child is always considered your own
child.
• The child must not have provided more than half of their own support and you must
claim the child as a dependent on your federal tax return.
• If you have three or more qualifying children, you can use an alternative formula
to determine the refundable portion. Under the alternative formula, the refundable
portion is equal to the amount by which your Social Security taxes (those taken out
of your wages or paid out as self-employment taxes) exceed your earned income
credit.
• Here's a quick example of how the phase-outs would work. Let's assume that as a
single taxpayer, you are entitled to a credit of $2,000 but your income is above the
$200,000 threshold: it's $201,000. Your credit would be reduced by $50 (because
you're $1,000 over the threshold amount) so that your available credit is $1,950.
• As your income climbs, the credit disappears completely. So, as a single taxpayer
making income over $240,000, your credit is reduced by $2,000, bringing the
available credit to zero (40 x $50 = $2,000).
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2017 Tax Cuts and Jobs Act-Rates, Brackets and Exemptions
Net Operating Losses-Individuals
NEW LAW IRC SECTION 461
Effective for tax years beginning after 12/31/2017 and before 1/1/2026
(Sec. 11012 of Act)
• Excess business losses (Schedules C, E, F or K-1) are no longer allowed to be
carried back, but must be carried forward for losses after 2017.
• Carryovers are limited to the lesser of the NOL or 90% of taxable income (without
the NOL carryforward).
• NOL is calculated as business losses – (gross income + $250,000) The $250,000
threshold is indexed for inflation after 2018.
• K-1 loss limitations are applied at the 1040 level.
• The rules on NOL’s apply after passive loss rules.
COMMENTS AND CONCERNS
• Existing loss carry-forwards from before 2018 are unaffected by this change.
• The change makes the “Election to waive the carryback” obsolete after 2017
returns.
• Net operating losses carried forward may be applied on the return as filed, or via
an amended return.
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2017 Tax Cuts and Jobs Act-Individual Deductions
Individual Deductions
Repeal of Alimony Deduction
NEW LAW IRC SECTION 215
Effective for years beginning after 12/31/2018
(Sec. 11051 of Act)
• The new law is effective for any divorce or separation instrument executed after
December 31, 2018, or for any divorce or separation instrument executed on or
before December 31, 2018, and modified after that date, if the modification
expressly provides that the amendments made by this section apply to such
modification.
• The bill repeals the law that alimony and separate maintenance payments are
deductible by the payor.
• The bill also repeals the Code provisions that specify that alimony and separate
maintenance payments are included in income.
COMMENTS AND CONCERNS
• Talk about a planning tool-every counselor, minister and friend should be aware
that you only have until the end of 2018 to finalize things if a divorce is coming and
the payor wants to deduct payments.
• Note that this rule grandfathers existing agreements made before 1/1/2019, thus
allowing continued deductions for qualified alimony and the reporting of payment
receipts as income.
• Also note that modifications to existing agreements will be subject to the new rules
if the modification so notes.
Alimony is a payment to or for a spouse or former spouse under a divorce or
separation instrument. It does not include voluntary payments that are not made
under a divorce or separation instrument. It is deductible by the payor on Form
1040 line 31a, and includible in income by the recipient on Form 1040 line11. The
recipient must file Form 1040 when receiving alimony, not 1040A or 1040EZ.
1. Alimony and separate maintenance payments are deductible from
income by the payor spouse under IRC Sec. 215 if includable in income
of the payee spouse under IRC Sec. 71.
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2017 Tax Cuts and Jobs Act-Individual Deductions
2. Property settlement payments and child support are deemed gifts
(§1041) between spouses and are never income or deductions. But, if
the following specific requirements are met, a payment received by, or
on behalf of, the payee spouse (or former spouse) qualifies as an
alimony or separate maintenance payment:
Alimony is Deductible or Taxable Under the Short Form Summary:
• It must be paid in cash
• It must be received by the spouse or on behalf of the spouse
• It must be paid in accordance with a written divorce decree or separation
agreement
The 7 Rules for Alimony
1. Payment must be in cash (transfer of property or services or the use
of property do not qualify).
2. Received by spouse (or on behalf of spouse - i.e., indirect alimony).
Cash payments, checks, or money orders to a third party on behalf of your spouse under
the terms of your divorce or separation instrument can be alimony, if they otherwise
qualify. These include payments for your spouse's medical expenses, housing costs (rent,
utilities, etc.), taxes, tuition, etc. The payments are treated as received by your spouse
and then paid to the third party. The payments must be made because of a written
request of the ex-spouse.
3. Received under divorce or written separation agreement (i.e., no
voluntary payments).
In (Anderson) TC Memo 2016-47 the IRS argued that an Alabama circuit court’s pretrial
order was not a written divorce or separation instrument as required and that the taxpayer
voluntarily made payments to his ex-wife. The tax court disagreed, ruling that the pretrial
order was a written instrument incident to a divorce decree and that it required the taxpayer
to make the alimony payments.
In addition, alimony includes premiums you must pay under your divorce or separation
instrument for insurance on your life to the extent your spouse owns the policy. In
(Johnson) TC Memo 2014-67 the court determined that the taxpayer did not qualify for an
alimony deduction because, although described in the divorce decree as separate
maintenance, payments would terminate upon graduation from high school of the couple's
youngest child. Any payment subject to a child related contingency is child support and
not alimony.
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2017 Tax Cuts and Jobs Act-Individual Deductions
4. A payment is not alimony if the agreement designates the payments
as excludable from payee spouse’s gross income.
In (Nuzum) TC Summ. Op. 2016-9 the taxpayer argued that payments received from the
ex-spouse were designated as property settlement payments in the divorce decree. The
court ruled that the divorce decree did exactly the opposite as it expressly designated the
payments made by the ex-spouse as alimony payments includable in the taxpayers’
taxable income.
But, see (Ringbloom) TC Summ. Op. 2015-12 where the taxpayer transferred an IRA to
his ex-wife and tried to deduct the transfer as alimony. The court ruled that the transfer
was a tax-free divorce related property transfer, not an alimony payment.
5. A payee and payor spouse cannot live together (no joint return).
a. Payments to your spouse while you are members of the same
household are not alimony if you are legally separated under
a decree of divorce or separate maintenance. A home you
formerly shared is considered one household, even if you
physically separate yourselves in the home.
b. You are not treated as members of the same household if one
of you is preparing to leave the household and does leave no
later than 1 month after the date of the payment.
6. The alimony must stop after the payee spouse’s death (state statutes
may require payment, if the agreement is silent!)
7. Recapture may be required if “excess front-loading” (i.e., if the
alimony payments in the first year exceed the average payments in
the second and third year by more than $15,000 and to the extent the
payments in the second year exceed the payments in the third year
by more than $15,000).
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2017 Tax Cuts and Jobs Act-Individual Deductions
Repeal of Moving Expense Deduction
NEW LAW IRC SECTION 132 and 217
Effective for years beginning after 12/31/2017 and before 1/1/2026
(Sec. 11048 and 11049 of Act)
• The new law suspends the exclusion of any moving expense reimbursements
except as noted below.
• The new law also suspends the deduction for moving expenses paid during this
period of time.
• However, during that suspension period, the provision retains the deduction for
moving expenses and the rules providing for exclusions of amounts attributable to
in-kind moving and storage expenses (and reimbursements or allowances for
these expenses) for members of the Armed Forces (or their spouse or dependents)
on active duty that move pursuant to a military order and incident to a permanent
change of station.
COMMENTS AND CONCERNS
• Historically moving expense deductions were allowed under the 3-tests rule:
1. The move must be related to the start of work at a new location as to both
time and place
▪ The time frame is generally 1 year-expenses incurred within 1 year
from the 1st day of wok at the new location qualify as moving costs.
▪ Note that the taxpayer does not have to have a job to meet this rule,
but that they must actually begin work soon after the move.
▪ Generally consider a move closely related in place to the start of
work if the distance from the new home to the new job location is
not more than the distance from the former home to the new job
location.
▪ If the move does not meet this requirement, you may still be able to
deduct moving expenses if you can show that:
• The taxpayer is required to live at the new home as a
condition of employment, or
• The taxpayer will spend less time or money commuting from
the new home to the new job location.
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2017 Tax Cuts and Jobs Act-Individual Deductions
Retention of Educator Deduction
NEW LAW IRC SECTION 62
Effective now
• The bill retains the present-law above-the-line deduction and limit for certain
expenses of eligible educators.
COMMENTS AND CONCERNS
• Eligible educators are elementary or secondary school teachers, instructors,
counselors, principals, or aides in a school for at least 900 hours during a school
year. An eligible educator may take an “above-the-line” deduction for ordinary and
necessary expenses incurred 1) by reason of participation in professional
development courses related to the curriculum or students the educator teaches,
or 2) in connection with books, supplies, computer and other equipment, and
supplementary materials to be used in the classroom. The deduction may not
exceed $250 (for 2017) in expenses, and is indexed for inflation.
• A MFJ couple who both qualify may deduct up to $250 each.
• Qualified teacher expenses must be reduced by reimbursements that are not
taxable, excludable US savings bond interest and tax free ESA and tuition program
distributions.
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2017 Tax Cuts and Jobs Act-Individual Deductions
Repeal of Itemized Deduction Limit
NEW LAW IRC SECTION 68
Effective for years beginning after 12/31/2017 and before 1/1/2026
(Sec. 11061 of Act)
• The bill reduces the overall limit on itemized deductions
COMMENTS AND CONCERNS
• For 2017, up to 80% of certain itemized deductions were phased out for “high
income” taxpayers. The phase out applied to taxpayers with AGI over a threshold
amount: $261,500 (single), $313,800 (married filing jointly), $287,650 (head of
household), or $156,900 (married filing separately). Since 2014 these threshold
amounts have been annually adjusted for inflation. Basically, deductions are
reduced by 3% of the amount by which AGI exceeds the threshold. However,
deductions for medical expenses, investment interest, casualty and theft losses,
and gambling losses are not reduced.
Average Itemized Deductions (courtesy Walters Kluwer)
Adjusted Gross Medical Expenses Taxes Interest Charitable
Income Contributions
$8,787 $3,566 $7,129
under $15,000 $1,427
$15,000 to $8,477 $3,376 $6,619 $2,339
$30,000
$8,209 $4,098 $6,511 $2,594
$30,000 to
$50,000 $9,614 $6,679 $7,553 $3,147
$50,000 to $11,122 $10,983 $9,147 $4,130
$100,000
$18,092 $17,763 $11,642 $5,786
$100,000 to
$200,000
$200,000 to
$250,000
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Temporary Reduction of Medical Expense Deduction
NEW LAW IRC SECTION 213
Effective for years beginning after 12/31/2016 and before 1/1/2019
(Sec. 11027 of Act)
• The Act provides that, for taxable years beginning after December 31, 2016 and
ending before January 1, 2019, the threshold for deducting medical expenses shall be
7.5% for all taxpayers. For these years, this threshold applies for purposes of the AMT
in addition to the regular tax.
COMMENTS AND CONCERNS
• Note that this is one of the few retroactive changes and affects 2017 returns
filed in 2018. Previous rules had 2017 moving to a 10% threshold for all taxpayers,
even those age 65 or older. It makes “expense bunching” much more important.
• Medical expenses are the costs of diagnosis, cure, mitigation, treatment, or
prevention of disease, and the costs for treatments affecting any part or function
of the body. They include the costs of equipment, supplies, and diagnostic devices
needed for these purposes. They also include dental expenses.
• Medical care expenses must be incurred primarily to alleviate or prevent a physical
or mental defect or illness. They do not include expenses that are merely beneficial
to general health, such as vitamins or a vacation.
• Medical expenses include the premiums paid for insurance that covers the
expenses of medical care, and the amounts paid for transportation to get medical
care. Medical expenses also include amounts paid for qualified long-term care
services and limited amounts paid for any qualified long-term care insurance
contract.
1. The medical mileage rate for 2017 is 17 cents per mile, and for 2018
18 cents per mile. Parking and tolls are deductible in addition to the
standard mileage rate.
2. Deductible medical insurance premiums include Medicare Part B & D,
dental, vision and supplemental insurance policies.
3. Transportation costs may also include airfare, train/bus/taxi,
ambulance, and the costs of a person traveling with a patient needing
accompaniment.
• Medical expenses are deducted when paid, regardless of when the services
were provided.
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Repeal of Reduction for Taxes Not Paid by a Business
NEW LAW IRC SECTION 164
Effective for years beginning after 12/31/2017 and before 1/1/2026
(Sec. 11042 of Act)
• The Act provides that individuals as a general rule are only allowed deductions for
State, local, and foreign property taxes, and sales taxes, that are presently
deductible in computing income on an individual’s Schedule C, Schedule E, or
Schedule F on such individual’s tax return.
• The law includes the following exception. A taxpayer may claim an itemized
deduction of up to $10,000 ($5,000 for married taxpayer filing a separate return)
for the aggregate of (i) State and local property taxes not paid or accrued in
carrying on a trade or business, or an activity described in section 212, and (ii)
State and local income, war profits, and excess profits taxes (or sales taxes in lieu
of income, etc. taxes) paid or accrued in the taxable year. Foreign real property
taxes may not be deducted under this exception.
• The law also provides that in the case of an amount paid in a taxable year
beginning before January 1, 2018, with respect to a State or local income tax
imposed for a taxable year beginning after December 31, 2017, the payment shall
be treated as paid on the last day of the taxable year for which such tax is so
imposed for purposes of applying the provision limiting the dollar amount of the
deduction. Thus, under the provision, an individual may not claim an itemized
deduction in 2017 on a pre-payment of income tax for a future taxable year in order
to avoid the dollar limitation applicable for taxable years beginning after 2017.
COMMENTS AND CONCERNS
• Under these new rules, the deduction for a home office (where qualified-see below)
becomes of primary importance for Schedule C, E and F filers because of the
ability to allocate property taxes from potentially non-deductible items on Schedule
A to partially deductible on the appropriate business schedule.
• Similarly, accountable expense plans should be used (see below) by employers to
reimburse employees for allocable expenses including property tax for work-from-
home situations.
• Note that taxes paid on foreign property are no longer deductible as itemized
deductions, nor are any amounts or property ownership from prior years
grandfathered.
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• Also note that the limit is applied as the lesser of $10,000 or (state/local income
tax (or state/local sales tax, if higher) + state/local US property tax).
• An allocation of property taxes on the closing statement of a new home purchase
now becomes a bigger negotiating point.
• Ministers receiving a housing allowance should modify it to reflect a reimbursement
of property tax so as to minimize the effect of property tax on the $10,000 limit.
• The requirement to include state tax refunds as income has effectively been limited
to $10,000 or less after 2018. Refunds received in 2018 for taxes paid and
deducted in 2017 will still be taxable.
• The alternative minimum tax effect of most tax deductions has effectivelybeen
eliminated!
Preparer Tip: Taxpayers who own unimproved investment, non-income producing land
should consider making a Section 266 election under the new law. This election allows
the real estate taxes, interest and other charges to be added to the cost of the land under
Reg. 1.266-1(b)(1)(i) rather than be currently deducted. The taxpayer may elect to
capitalize one of these costs and deduct the others if deductible and of a different category
such as capitalizing taxes and deducting interest.
The election is made annually and requires a statement in the taxpayer's return setting
forth the description of the property and the expenses to which the election applies. In
addition, if the property produces income in a given year, the election is not available. The
election must be made by the due date of the return. In PLR201105014 the taxpayer was
granted the ability to make the election on an amended return.
• Do not divide delinquent taxes between the buyer and seller if the taxes are for
any real property tax year before the one in which the property is sold. Even if the
buyer agrees to pay the delinquent taxes, the buyer cannot deduct them. The
buyer must add them to the cost of the property. The seller can deduct these taxes
paid by the buyer. However, the seller must include them in the selling price.
• Clearly, consideration of the state of residence for the taxpayer has become a
bigger issue than in prior years. Those residents of high tax states with a second
home in Florida or Texas may wish to consider making the low tax state their
primary residence.
• IR 2017-210 (12/27/17) allows prepaid property tax to be deductible when paid if:
assessed in 2017, and paid in 2017 (state must allow it and accept payment).
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• In order to utilize and deduct home office costs a part of the home must be used
regularly and exclusively for:
o The principal place of business for a trade or business, or
o A place of business used by patients, clients, or customers to meet or deal
with the taxpayer in the normal course of business, or
o In connection with the trade or business if it is a separate, non-attached
structure, or
o Used for storage of inventory or product samples (if the home is the only
fixed location of the trade or business),
▪ The structure does not have to be the principal place of business or
a place where you meet patients, clients, or customers.
o Daycare purposes.
▪ A daycare facility in the taxpayer’s home will normally not meet the
exclusive use test. However the home office is allowed if the
taxpayer is in the business of providing day care for children, aged
or mentally or physically disabled persons and
▪ Has a valid business license (or exempted from) or approval as a
daycare center or home under state law.
S Corporation Shareholders
Many shareholders in S corporations incur home office expenses to enable them to
accomplish the many bookkeeping or management tasks that cannot be performed at
a retail store, warehouse or similar workplace environment. Sadly, Congress and the
IRS have never provided for a mechanism for S corporation shareholders. Some
accountants incorrectly take a deduction on page 2 of Schedule E for “Unreimbursed
shareholder expenses” but that provision only applies to partners in a partnership, and
upon exam the expense will be disallowed and often the preparer will be penalized.
Taking the deduction as an employee business expense is no longer allowed in 2018
under the 2017 Tax Cuts and Jobs Act.
Paying rent to the shareholder is also not a good plan, income tax-wise, because most
office in home expenses are not deductible when the office is rented to the taxpayer’s
employer under Internal Revenue Code Section 280A(a) which states: “Except as
otherwise provided in this section, in the case of a taxpayer who is an individual or an
S corporation, no deduction otherwise allowable under this chapter shall be allowed
with respect to the use of a dwelling unit which is used by the taxpayer during the
taxable year as a residence.” The deduction for allocable mortgage interest, property
tax and casualty losses is still allowed, but no deduction is allowed for utilities, repairs,
depreciation or other home office related expenses. This code section was added as a
result of 1986’s Feldman tax court case.
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Rather than claiming an office-in-the-home deduction as a miscellaneous itemized
deduction, an S Corporation shareholder-employee could have the corporation
reimburse the expenses properly allocable to the business use of the home under
accountable plan provisions. Reimbursement of business expenses is provided for
under Internal Revenue Code Section 132 under the accountable plan rules. Pursuant
to regulations applicable to Section 132, out-of-pocket business expenses should be
documented and reimbursed on a current, monthly basis. We believe that a clear
establishment of square footage used exclusively and regularly for the home office as
a percentage of total square footage should be determined, and that the taxpayer turn
in these expenses no less often than quarterly for reimbursement, preferably monthly
under the accountable plan rules requiring timely submission and reimbursement. We
also believe the S corporation’s Board of Directors should approve this policy in its
formal board meetings and not it in the minutes of the corporation.
As an employee the home office must be for the convenience of the employer. This
means the home office is required as a condition of employment, it is necessary for the
business to function or it is necessary for you to properly perform your duties as an
employee. If there is no other place of business, such as a rented office or storefront,
the home office should qualify, or if there is no other suitable place available for sales
calls, client meetings and phone calls and client service at an existing facility the home
office should also qualify.
However, under Section 280A, the deduction for expenses allocable to the business
use of the home is limited to the net income derived from the business activity. The
application of this limitation involving an S Corporation was provided in a 1996 Tax
Court Memorandum Decision 1996-141 [Cunningham v. Commissioner].
In that instance, the taxpayer’s wholly owned S Corporation deducted expenses
allocable to real property owned by the taxpayer and used by the S Corporation as its
sole business location. There was no rental agreement between the taxpayer and the
S Corporation. The Internal Revenue Service argued, and the Court agreed, that the
deduction of the expenses allocable to that real property were subject to the income
limitation imposed by Section 280A. [The taxpayer had unsuccessfully argued that the
business use portion of the property was separate from the residence portion of the
property, which would have exempted the property from the 280A limitations.] The S
Corporation’s deduction of the home office expenses were disallowed because the S
Corporation had reported net losses for the years under review. But all was not lost,
because expenses disallowed due to the income limitation would carry-over to
subsequent years and could be deducted to the extent of S Corporation net income in
those years.
What expenses of the S corporation shareholder should qualify for reimbursement? We
believe any out-of-pocket expenses should qualify (including rent), other than mortgage
principal payments and those expenses that are specifically allocable to other areas of
the home. In particular this would also provide the S corporation shareholder with a tax
free reimbursement for such things as shelving, lighting and improvements to the
specific office area and move the deduction to the S corporation return where it belongs.
We do not believe that a reimbursement may be made for depreciation because it is
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not an out of pocket shareholder expense, but we can find no specific court cases
commenting either way.
Of course, the home office reimbursement will reduce any normal residential tax
deductions for mortgage interest and property tax on Schedule A. Additionally, no
recapture would apply upon the sale of the home since the taxpayer was never able to
deduct depreciation.
Partner/Member in a 1065 Entity
A Member in a 1065 entity that also works from home should consider meeting the same
home office rules that other taxpayers need to meet, and then they should consider the
following to enable home office and the related allocable property tax deductions.
• Generally, a partner may not directly deduct the expenses of the partnership on
his or her individual returns, even if the expenses were incurred by the partner in
furtherance of partnership business. An exception applies, however, when there
is an agreement among partners, or a routine practice equal to an agreement,
that requires a partner to use his or her own funds to pay a partnership expense.
Cropland Chem. Corp. v. Commissioner, 75 T.C. 288, 295 (1980); Klein v.
Commissioner, 25 T.C. 1045, 1052 (1956).
• The instructions to Part Two of Schedule E state that the taxpayer may deduct
“unreimbursed ordinary and necessary expenses of the partnership if you were
required to pay these expenses under the partnership agreement.” We
understand that auditors aggressively pursue the disallowance of this
deduction and recommend the use of an accountable plan to get the
expenses to Form 1065 and avoid the problem completely.
• In TC Memo 2011-289 (McLauchlan) the court ratified the deductibility of
unreimbursed expenses when the partner was required to pay them, they were
valid business expenses, and the partner could not seek reimbursement. See
also PLR 9316003 for similar holdings.
• Note-this is a special rule for LLC or partnership owners only. S Corporation
and C Corporation shareholders are legally separate entities and do not receive
this special treatment.
• These deductions would also reduce SE income.
• The instructions further state to separately list these items on Line 27, not netting
them against other partnership income.
• The instructions say that the title of the partnership entered in Line A should be
“UPE”.
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• The court now states that, in order for a partner to deduct unreimbursed
partnership expenses, the partnership agreement must:
• In writing require that the partners pay expenses personally,
• In writing state that no reimbursement will be made,
• Be specific as to expenses.
Example of partnership agreement for unreimbursed partnership expenses:
The partners hereby agree that for reasons of business consistency individual partners
may wish to emphasize certain aspects of the partnership’s business more than the
partners as a whole wish to emphasize these same matters. Because of this difference
of opinion in matters of business importance to the partnership, the individual partners
agree that they are required to pay these expenses personally, and to not seek
reimbursement from the partnership, as summarized below.
“In situations where the partnership is not in agreement as to amounts to be paid directly
by the partnership, individual partners are required to pay these expenses personally
(such as automobile expenses, travel & entertainment, and home office expenses) and
to not expect or seek reimbursement from the partnership for these items.”
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Worksheet for Schedule F, Partners and Employees to Determine Home
Office Deduction
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Modification of Home Mortgage Interest Deduction
NEW LAW IRC SECTION 163
Effective for years beginning after 12/31/2017 and before 1/1/2026
(Sec. 11043 of Act)
• A taxpayer may treat no more than $750,000 as acquisition indebtedness
($375,000 in the case of married taxpayers filing separately). Under the final bill
the requirement that this limit apply to only the principal residence was removed,
so it still applies (in total, not individually) to two homes.
• In the case of acquisition indebtedness incurred before December 15, 2017 this
limitation is $1,000,000 ($500,000 in the case of married taxpayers filing
separately). For binding written contracts entered into before 12/15/17 to close
before 1/1/2018 and which does close before 4/1/18 the taxpayer may use the old
rules.
• For taxable years beginning after December 31, 2025, a taxpayer may treat up to
$1,000,000 ($500,000 in the case of married taxpayers filing separately) of
indebtedness as acquisition indebtedness, regardless of when the indebtedness
was incurred.
• Additionally, the law suspends the deduction for interest on home equity
indebtedness. Thus, for taxable years beginning after December 31, 2017, a
taxpayer may not claim a deduction for interest on home equity indebtedness. The
suspension ends for taxable years beginning after December 31, 2025.
• Refinanced prior law loans after 12/15/17 may use the old law limits up to the
balance due on the date of refinancing, but must apply the new law on additional
borrowings unless the refinancing extends the term of the loan, in which case
the new law applies!
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Example: Harold & Maude had $600,000 of outstanding mortgage debt on their
home at 12/11/2017, with a 23 and 2-month year remaining term. On March 1, 2018
they refinance the balance.
• If they refinance $600,000 or less over 23 years or less the entire amount of
interest is grandfathered and allowable as a deduction.
• If they refinance $700,000 over 23 years or less and do not use the extra
money to improve the home, $600,000 will be grandfathered and the excess
will be non-deductible, without regard to the home’s original cost. You may not
grandfather acquisition debt greater than the balance due on the date of
refinancing.
• If they refinance $700,000 over more than 23 years, the new law will apply to
the entire amount, but the result will be unchanged from the previous example
since the acquisition debt is less than the $600,000 limit.
Example 2: Harold & Maude had $800,000 of outstanding mortgage debt on their
home at 12/11/2017, with a 23 and 2-month year remaining term. On March 1, 2018
they refinance the balance.
• If they refinance $800,000 or less over 23 years or less the interest on the first
$1,000,000 is grandfathered and deductible because the loan existed at
12/15/17, any amount in excess of the original $800,000 limit is non-
deductible.
• If they refinance $900,000 over 23 years or less and do not use the extra
money to improve the home, $800,000 will be grandfathered and the excess
will be non-deductible, without regard to the home’s original cost. You may not
grandfather acquisition debt greater than the balance due on the date of
refinancing.
• If they refinance $900,000 over more than 23 years, the new law will apply to
the entire amount, and the result will be a limit of $750,000 of mortgage debt.
Example 3: Harold & Maude had no outstanding mortgage debt at 12/31/2017. In
2018 they borrow $500,000 against a vacation home to buy the vacation home. The
interest on the entire amount will be deductible since the final version of the new law
did not change the $750,000 of acquisition debt rule for up to two homes.
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COMMENTS AND CONCERNS
• Complete understanding of home mortgage rules is of paramount importance
under the new bill, particularly in relationship to whether the tracing rules apply, or
the mortgage rules apply when borrowing money.
• The “10-T” election we have discussed in our 1040 classes for the last several
years also becomes an incredibly important election because of the loss of the
home equity interest deduction.
• Homes under construction are considered qualified homes for purposes of the
acquisition indebtedness limit for a period of up to 24 months, as long as it
becomes the taxpayer’s qualified home when it is ready for occupancy. The 24
months starts any time on or after the day construction begins.
• Other than a few coastal states, most Americans will be unaffected directly by this
change as long as their tax advisor clearly understands and applies the rules. The
doubling of the standard deduction will eliminate the need for many of them to care!
Preparer Trap: If a homeowner borrows money on a personal residence for business
purposes, the homeowner is required to report that interest as home equity interest on
Schedule A because the security underlying the loan defines the deductibility, not the use
of the proceeds, under Reg. 1.163-8T(m)(3). This is the only exception to the normal tracing
rules!
Preparer Tip: The above rule can be changed if the taxpayer makes an election under Reg.
1.163-10T(o)(5) to not have the home residence rules apply. Essentially the election (called
the 10-T election) avoids the home mortgage interest rules and reverts to the tracing rules.
The 10-T election should be physically attached to the taxpayers return and applies to the
interest paid on that debt for the current and future years.
Example 10-T Election-Attach to Initial Election Year Return Only
Taxpayer: ____________________________________________ Form: 1040
FEIN: ___________________________ Tax Year: ___________
The above taxpayer hereby elects to treat $ ____________ of home equity debt as trade
or business debt. The proceeds of this home equity debt were utilized in the trade or
business of the above taxpayer.
During the above tax year, the taxpayer incurred and paid $ _________ of interest which
was deducted on Schedule ___, Line ___.
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Repeal of Personal Casualty and Theft Loss Deduction
NEW LAW IRC SECTION 165
Effective for years beginning after 12/31/2017 and before 1/1/2026
(Sec. 11044 of Act)
• Under the new law, a taxpayer may claim a personal casualty loss (subject to the
limitations normally applicable) only if such loss was attributable to a disaster
declared by the President.
Modification of Gambling Loss Deduction
NEW LAW IRC SECTION 165
Effective for years beginning after 12/31/2017 and before 1/1/2026
(Sec. 11050 of Act)
• Gambling loss deductions are limited to winnings. The limit also now applies to
other expenses incurred in relation to gambling such as travel, supplies, research,
etc.
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Modification of Charitable Contribution Deduction
NEW LAW IRC SECTION 165
Effective for years beginning after 12/31/2017 and before 1/1/2026
(Sec. 11023 of Act)
• The AGI limit for charitable contributions increases from the current 50% for most
cash contributions to 60% and continues for the entire 5-year carryover period if
the limit is reached in the year of the gift.
Public charities, private Ordinary Capital gain Capital gain
Income property sold property for
operating foundations and property and by the the
Cash Recipient recipient’s
private distributing Contributions use
Pre 2018-50% 30%
foundations 20%
Post 2017-60% 20%
Nonoperating private 2%
30%
foundations
• The Bill also repeals the deduction for payments made in exchange for college
athletic event seating rights.
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Repeal of 2% Miscellaneous Itemized Deductions
NEW LAW IRC SECTION 62, 67 and 212
Effective for years beginning after 12/31/2017 and before 1/1/2026
(Sec. 11045 of Act)
• The new law suspends all miscellaneous itemized deductions that are subject to
the two-percent floor under present law. Thus, under the provision, taxpayers may
not claim the items as itemized deductions for the taxable years to which the
suspension applies.
COMMENTS AND CONCERNS
• There are 2 main categories affected by this change: employee business expenses
and investment and tax-prep expenses.
• The employee business expense lost deduction is easily replaced by employers
that setup accountable plans to reimburse employees. Particularly affected are
employees such as truck drivers, railroad employees, ministers and outside
salespeople with large employee business expense amounts. We have been
telling people for years that employers need to pay these folks through an
accountable plan, and it has now become mandatory. Even for people not in this
category, they should pressure employers to set up accountable expense plans to
reimburse things like professional dues, licenses and education, malpractice
insurance premiums, medical exam fees, passports, publications, uniforms and
tools.
• As far as the deduction for investment expenses, there is not much that can be
done here at the individual level. Look for financial institutions that do not charge
for safe deposit boxes, investment types where the expenses are paid by the fund
rather than the individual, IRA accounts without a separate trustee fee (or paid out
of the IRA assets) reimbursement for job search expenses, and similar items.
• The deduction for tax preparation expenses does make it even more important to
allocate bills to appropriate non-itemized schedules, and to have shareholders and
partners seek reimbursement from entities for the additional cost of preparing
returns with K-1’s.
• This also makes it more important to turn hobby activities (deductions are 2%
itemized) to for-profit businesses.
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• Because the repayment of overpaid Social Security benefits also falls under the
2% category, folks working between 62 and 66 should be even more aware of any
income limitations before payments are repaid.
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Education Savings-529 Plans & Able Accounts
NEW LAW IRC SECTION 529
Effective for tax years beginning after 12/31/2017 and before 1/1/2026
(Sec. 11024 and 11025 of Act)
• 529 plans may be rolled over to ABLE accounts 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. Such rolled-over amounts count
towards the overall limitation on amounts that can be contributed to an ABLE
account within a taxable year. Both accounts must have the same beneficiary or a
member of the same family, and you can roll over up to the annual gift exclusion
amount, which is $15,000 in 2018.
• Sec. 11024 temporarily increases the contribution limitation to ABLE accounts
under certain circumstances. While the general overall limitation on contributions
(the per-donee annual gift tax exclusion ($15,000 for 2018)) remains the same, the
limitation is temporarily increased with respect to contributions made by the
designated beneficiary of the ABLE account. Under the temporary provision, after
the overall limitation on contributions is reached, an ABLE account’s designated
beneficiary may contribute an additional amount, up to the lesser of (a) the Federal
poverty line for a one-person household; or (b) the individual’s compensation for
the taxable year.
• Additionally, the provision temporarily allows a designated beneficiary of an ABLE
account to claim the saver’s credit for contributions made to his or her ABLE
account.
Comments and Concerns
ABLE Accounts, which are tax-advantaged savings accounts for individuals with
disabilities and their families, were created as a result of the passage of the ABLE Act.
The beneficiary of the account is the account owner, and income earned by the accounts
will not be taxed. Contributions to the account made by any person (the account
beneficiary, family and friends) will be made using post-taxed dollars and will not be tax
deductible, although some states may allow for state income tax deductions for
contribution made to an ABLE account.
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Millions of individuals with disabilities and their families depend on a wide variety of public
benefits for income, health care and food and housing assistance. Eligibility for these
public benefits (SSI, SNAP, Medicaid) require meeting a means or resource test that limits
eligibility to individuals to report more than $2,000 in cash savings, retirement funds and
other items of significant value. To remain eligible for these public benefits, an individual
must remain poor. For the first time in public policy, the ABLE Act recognized the extra
and significant costs of living with a disability. These include costs, related to raising a
child with significant disabilities or a working age adult with disabilities, for accessible
housing and transportation, personal assistance services, assistive technology and health
care not covered by insurance, Medicaid or Medicare.
Eligible individuals and their families are allowed to establish ABLE savings accounts that
will not affect their eligibility for SSI, Medicaid and other public benefits. The legislation
explains further that an ABLE account will, with private savings, "secure funding for
disability-related expenses on behalf of designated beneficiaries with disabilities that will
supplement, but not supplant, benefits provided through private insurance, Medicaid, SSI,
the beneficiary's employment and other sources."
The ABLE Act limits eligibility to individuals with significant disabilities with an age of onset
of disability before turning 26 years of age. If you meet this age criteria and are also
receiving benefits already under SSI and/or SSDI, you are automatically eligible to
establish an ABLE account. If you are not a recipient of SSI and/or SSDI, but still meet the
age of onset disability requirement, you could still be eligible to open an ABLE account if
you meet Social Security’s definition and criteria regarding significant functional limitations
and receive a letter of certification from a licensed physician. You need not be under the
age of 26 to be eligible for an ABLE account. You could be over the age of 26, but must
have had an age of onset before the individual’s 26 birthday.
The total annual contributions by all participating individuals, including family and friends,
for a single tax year is $15,000 for 2018. The amount may be adjusted periodically to
account for inflation. Under current tax law, $15,000 is the maximum amount that
individuals can make as a gift to someone else and not report the gift to the IRS (gift tax
exclusion). The total limit over time that could be made to an ABLE account will be subject
to the individual state and their limit for education-related 529 savings accounts. Many
states have set this limit at more than $300,000 per plan. However, for individuals with
disabilities who are recipients of SSI, the ABLE Act sets some further limitations. The first
$100,000 in ABLE accounts would be exempted from the SSI $2,000 individual resource
limit. If and when an ABLE account exceeds $100,000, the beneficiary’s SSI cash benefit
would be suspended until such time as the account falls back below $100,000. It is
important to note that while the beneficiary’s eligibility for the SSI cash benefit is
suspended, this has no effect on their ability to receive or be eligible to receive medical
assistance through Medicaid.
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2017 Tax Cuts and Jobs Act-General Individual Items
Additionally, upon the death of the beneficiary the state in which the beneficiary lived may
file a claim to all or a portion of the funds in the account equal to the amount in which the
state spent on the beneficiary through their state Medicaid program. This is commonly
known as the “Medicaid Pay-Back” provision and the claim could recoup Medicaid related
expenses from the time the account was open.
A "qualified disability expense" means any expense related to the designated beneficiary
as a result of living a life with disabilities. These may include education, housing,
transportation, employment training and support, assistive technology, personal support
services, health care expenses, financial management and administrative services and
other expenses which help improve health, independence, and/or quality of life.
Distributions from an ABLE account are excludable from income to the extent that the total
distribution does not exceed the qualified disability expenses of the designated beneficiary
during the taxable year. If a distribution from an ABLE account exceeds the qualified
disability expenses of the designated beneficiary, a pro rata portion of the distribution is
excludable from income. The portion of any distribution that is includible in income is
subject to an additional 10-percent tax unless the distribution is made after the death of
the beneficiary.
NEW LAW IRC SECTION 529
Effective for tax years beginning after 12/31/2017
(Sec. 11032 of Act)
• 529 plans are now allowed to distribute not more than $10,000 in expenses for
tuition incurred during the taxable year in connection with the enrollment or
attendance of the designated beneficiary at a public, private or religious
elementary or secondary school. This limitation applies on a per-student basis,
rather than a per-account basis. Thus, under the provision, although an individual
may be the designated beneficiary of multiple accounts, that individual may receive
a maximum of $10,000 in distributions free of tax,
• The provision also modifies the definition of higher education expenses to include
certain expenses incurred in connection with a homeschool. Those expenses are
(1) curriculum and curricular materials; (2) books or other instructional materials;
(3) online educational materials; (4) tuition for tutoring or educational classes
outside of the home (but only if the tutor or instructor is not related to the student);
(5) dual enrollment in an institution of higher education; and (6) educational
therapies for students with disabilities.
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2017 Tax Cuts and Jobs Act-General Individual Items
Comments and Concerns
Section 529 and Prepaid Tuition Plans
Congress created 529 plans in 1996. A qualified tuition program (QTP) (also known as a
529 plan or program) is a program set up to allow you to either prepay, or contribute to an
account established for paying, a student's qualified education expenses at an eligible
educational institution. Whoever purchases the Section 529 plan is the custodian and
controls the funds until they are withdrawn. One of our favorite sources for information on
529 plans is www.savingforcollege.com .
QTPs can be established and maintained by states (or agencies or instrumentalities of a
state) and eligible educational institutions. Because multiple accounts may be established
the taxpayer is not restricted to one specific state operated 529, even if already funded.
There is no deduction at the federal level for contributions to 529 plans, although many
states offer a state credit or deduction. Earnings are not subject to federal tax and
generally not subject to state tax when used for the qualified education expenses of the
designated beneficiary, such as tuition, fees, books, as well as room and board. You can
set one up and name anyone as a beneficiary — a relative, a friend, even yourself. There
are no income restrictions on either you, as the contributor, or the beneficiary. There is
also no limit to the number of plans you set up.
The table of state plans on the next page is reprinted from and courtesy of
savingforcollege.com . They also have an excellent state tax 529 college calculator at
http://www.savingforcollege.com/state_tax_529_calculator/
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2017 Tax Cuts and Jobs Act-General Individual Items
There are two types of 529 plans—prepaid tuition plans and college savings plans.
Every state offers at least one of these types of plans. Some states offer both, and now a
consortium of private colleges also offers a prepaid tuition plan.
Section 529 Plan Comparisons
Prepaid Tuition Plans College Savings Plans
Tuition and fees only Tuition, fees, books & supplies
Room & Board usually not covered Room & Board if at least ½ time
Lock in current tuition rates Not directly protected against tuition
increases
Must be resident of state offering plan Not limited to specific school or even state
May have age /grade limits No age/grade limits
No investment options Many investment options
Transferability limited for other schools to Fully transferable to other schools
equivalent tuition
May be transferred to siblings Fully transferrable to other family
members
Refund usually limited to deposit Fully refundable
Common tax features of both plans
Contributions cannot exceed the amount necessary to provide for the qualified education
expenses of the beneficiary. If you contribute to a 529 plan, however, be aware that there
may be gift tax consequences if your contributions, plus any other gifts, to a particular
beneficiary exceed $15,000 during the year. Anyone may contribute to a 529 plan.
Although the IRS typically allows you to give no more than $15,000 (2018) a year to
another person without a federal gift tax, you can contribute up to $75,000 (2018) to a 529
plan in one year. A special 529 rule allows you to lump together five years of the allowable
$15,000 annual gift-tax exclusion to jumpstart a 529 plan. While you will be precluded from
making any further excludible gifts for five years, compounding will make your earnings
grow faster than if you invested $15,000 in each of the five years. Remember to file Form
709 and check the box for the five-year treatment on page 2, Schedule A, Part B.
There are lifetime contribution limits, which vary by plan, ranging from $235,000 -
$400,000. Generally, changes in investment plans are restricted to once per year, but
additional contributions may be made at any time subject to the lifetime contribution limits.
The part of a distribution representing the amount paid or contributed to a QTP does not
have to be included in income. This is a return of the investment in the plan.
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2017 Tax Cuts and Jobs Act-General Individual Items
Student Loan Debt Forgiveness
NEW LAW IRC SECTION 108
Effective for tax years beginning after 12/31/2017 and before 1/1/2026
(Sec. 11023 of Act)
• The Act includes a new student loan COD exclusion on account of death or
disability of the student. Loans eligible for the exclusion under the Act are loans
made by (1) the United States (or an instrumentality or agency thereof), (2) a State
(or any political subdivision thereof), (3) certain tax-exempt public benefit
corporations that control a State, county, or municipal hospital and whose
employees have been deemed to be public employees under State law, (4) an
educational organization that originally received the funds from which the loan was
made from the United States, a State, or a tax-exempt public benefit corporation,
or (5) private education loans (for this purpose, private education loan is defined
in section 140(7) of the Consumer Protection Act).
• Under the provision, the discharge of a loan as described above is excluded from
gross income if the discharge was pursuant to the death or total and permanent
disability of the student.
Elimination of Medical Insurance Mandate
NEW LAW IRC SECTION 5000A
Effective for months beginning after 12/31/2018
(Sec. 11081of Act)
• The penalty for now having qualified health insurance is removed beginning in
2019. Penalties will still apply in 2017 and 2018.
Comments and Concerns
• Individual insurance markets are not eliminated, just the requirement to have
health insurance or pay a penalty.
• Applicable large employers (ALE) with 50 or more full time plus full time equivalent
employees are still required to offer qualified insurance or potentially face a
penalty, contrary to a lot of small business rumors!
• Some states already enforce a penalty for not having insurance (Massachusetts)
and some are considering a new state based penalty such as California,
Connecticut, D.C. and Maryland.
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2017 Tax Cuts and Jobs Act-General Individual Items
IRA Recharacterizations
NEW LAW IRC SECTION 408A
Effective for years beginning after 12/31/2017
(Sec. 13611 of Act)
• The act repeals the special rule that allows IRA contributions to one type of IRA
(either traditional or Roth) to be recharacterized as a contribution to the other type
of IRA. Thus, for example, under the provision, a conversion contribution
establishing a Roth IRA during a taxable year can no longer be recharacterized as
a contribution to a traditional IRA (thereby unwinding the conversion).
• Recharacterization is still permitted with respect to other contributions. For
example, an individual may make a contribution for a year to a Roth IRA and,
before the due date for the individual’s income tax return for that year,
recharacterize it as a contribution to a traditional IRA.
Comments and Concerns
• Historically the taxpayer had until the extended due date (10/15 of following year)
to “undo” a Roth conversion. This rule ended the ability to “re-characterize” Roth
conversions for years beginning after 12/31/2017.
• Some experts are saying that this means 2017 conversions may not be re-
characterized in 2018. However, the law says, “The amendments made by this
section shall apply to tax years beginning after December 31, 2017” (Emphasis
added by author). A re-characterization in 2018 for a 2017 conversion might still
be allowed because this is for a tax year unaffected by this change.
• Roth conversions may become less popular because of this change. However, if
tax rates increase in the future, the conversion strategy may still be wise because
the conversion occurred during low tax rate year.
Bob’s 6 Roth Conversion Rules
1. Convert any account
2. Convert any amount
3. FMV on conversion date is taxable
4. Tax on conversion is sometimes passable
5. Penalty is not assessable
6. Where will money come from to pay tax?
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2017 Tax Cuts and Jobs Act-General Individual Items
Retirement Plan Loans
NEW LAW IRC SECTION 402
Effective for years beginning after 12/31/2017
(Sec. 13613 of Act)
• The period during which a qualified plan loan offset amount may be contributed to
an eligible retirement plan as a rollover contribution is extended from 60 days after
the date of the offset to the due date (including extensions) for filing the Federal
income tax return for the taxable year in which the plan loan offset occurs, that is,
the taxable year in which the amount is treated as distributed from the plan.
• Under the Act, a qualified plan loan offset amount is a plan loan offset amount that
is treated as distributed from a qualified retirement plan, a section 403(b) plan or
a governmental section 457(b) plan solely by reason of the termination of the plan
or the failure to meet the repayment terms of the loan because of the employee’s
severance from employment. As under present law, a loan offset amount under
the provision is the amount by which an employee’s account balance under the
plan is reduced to repay a loan from the plan.
Extension of Time To Contest Levy
NEW LAW IRC SECTION 6343
Effective for years beginning after 12/31/2017
(Sec. 11071 of Act)
• The period of time to return property or the monetary proceeds from property
subject to wrongful IRS levy has been extended from 9 months to 2 years.
• The provision also extends from nine months to two years the period for bringing
a civil action for wrongful levy.
• The new rule applies to levies made after December 22, 2017, and to levies made
before 12/22/17 if 9 months had not passed since the original levy date.
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2017 Tax Cuts and Jobs Act-General Individual Items
Relief to 2016 Disaster Areas
NEW LAW IRC SECTION 3405
Effective for losses arising in years beginning after 12/31/2015 and before 1/1/2018
(Sec. 11028 of Act)
• Under the law, an exception to the 10-percent early withdrawal tax applies in the
case of a qualified 2016 disaster distribution from a qualified retirement plan, a
section 403(b) plan or an IRA. In addition, as discussed further, income attributable
to a qualified 2016 disaster distribution may be included in income ratably over
three years, and the amount of a qualified 2016 disaster distribution may be
recontributed to an eligible retirement plan within three years.
A qualified 2016 disaster distribution is a distribution from an eligible retirement
plan made on or after January 1, 2016, and before January 1, 2018, to an individual
whose principal place of abode at any time during calendar year 2016 was located
in a 2016 disaster area and who has sustained an economic loss by reason of the
events giving rise to the Presidential disaster declaration.
The total amount of distributions to an individual from all eligible retirement plans
that may be treated as qualified 2016 disaster distributions is $100,000. Thus, any
distributions in excess of $100,000 during the applicable period are not qualified
2016 disaster distributions.
Any amount required to be included in income as a result of a qualified 2016
disaster is included in income ratably over the three-year period beginning with the
year of distribution unless the individual elects not to have ratable inclusion apply.
Any portion of a qualified 2016 disaster distribution may, at any time during the
three year period beginning the day after the date on which the distribution was
received, be recontributed to an eligible retirement plan to which a rollover can be
made. Any amount recontributed within the three-year period is treated as a
rollover and thus is not includible in income. For example, if an individual receives
a qualified 2016 disaster distribution in 2016, that amount is included in income,
generally ratably over the year of the distribution and the following two years, but
is not subject to the 10-percent early withdrawal tax. If, in 2018, the amount of the
qualified 2016 disaster distribution is recontributed to an eligible retirement plan,
the individual may file an amended return to claim a refund of the tax attributable
to the amount previously included in income. In addition, if, under the ratable
inclusion provision, a portion of the distribution has not yet been included in income
at the time of the contribution, the remaining amount is not includible in income.
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2017 Tax Cuts and Jobs Act-General Individual Items
A qualified 2016 disaster distribution is a permissible distribution from a qualified
retirement plan, section 403(b) plan, or governmental section 457(b) plan,
regardless of whether a distribution otherwise would be permissible. A plan is not
treated as violating any Code requirement merely because it treats a distribution
as a qualified 2016 disaster distribution, provided that the aggregate amount of
such distributions from plans maintained by the employer and members of the
employer’s controlled group or affiliated service group does not exceed $100,000.
Thus, a plan is not treated as violating any Code requirement merely because an
individual might receive total distributions in excess of $100,000, taking into
account distributions from plans of other employers or IRAs.
A plan amendment made pursuant to the provision (or a regulation issued
thereunder) may be retroactively effective if, in addition to the requirements
described below, the amendment is made on or before the last day of the first plan
year beginning after December 31, 2018 (or in the case of a governmental plan,
December 31, 2020), or a later date prescribed by the Secretary. In addition, the
plan will be treated as operated in accordance with plan terms during the period
beginning with the date the provision or regulation takes effect (or the date
specified by the plan if the amendment is not required by the provision or
regulation) and ending on the last permissible date for the amendment (or, if
earlier, the date the amendment is adopted). In order for an amendment to be
retroactively effective, it must apply retroactively for that period, and the plan must
be operated in accordance with the amendment during that period.
Under the provision, in the case of a personal casualty loss which arose on or after
January 1, 2016, in a 2016 disaster area and was attributable to the events giving
rise to the Presidential disaster declaration, such losses are deductible without
regard to whether aggregate net losses exceed ten percent of a taxpayer’s
adjusted gross income. Under the provision, in order to be deductible, the losses
must exceed $500 per casualty. Additionally, such losses may be claimed in
addition to the standard deduction.
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