2018 was the first tax year for which the Tax Cuts and Jobs Act (TCJA) went into effects, coupling with the longest US government shutdown in history from December 2018 to January 2019. As we finally got past April 15th, 2019, let’s take a look at some of the major or key elements of the TCJA and how they really worked (or didn’t work) for the tax year 2018.
- Simplified individual tax form (Form 1040). The new law was aimed to simplify the Form 1040 while making it a “postcard” format. However, the Form 1040 did not get simplified as it actually moved some of the line items from the previous Form 1040 into six different separate schedules (Schedule 1 to Schedule 6). Unless you are a single taxpayer with W2 wages only and have no other types of income or tax credits, you probably have to add some of those “extra” schedules to your Form 1040. There were lots of confusions for those taxpayers who used to file their own tax returns manually or using other Do-it-Yourself tax preparation software. Even for clients engaging tax professionals, they need some explanations from their providers. Indeed, the new Form 1040 is merely a tax summary for which additional schedules will be needed to provide with the breakdowns.
- Standard deduction and itemized deduction. The new law increases the standard deductions ranging from 89% to 100% from the prior year’s figures. With such increases, many more taxpayers will no longer itemize their tax deduction.
However, the new law also puts a $10,000 cap on the total amount of state & local taxes (SALT) and property tax deductions. The $10,000 cap hurts most of the middle-income taxpayers living in states or localities with high-income taxes and property taxes. A typical family with two income earners living in Long Island, NY may lose tens of thousands in their itemizes deductions with TCJA. Depending on their tax brackets, those families may have to pay several thousand more in federal taxes.
- Elimination of personal exemption. The new law suspends the deduction for personal and dependency exemptions. Families with qualified children (children under age 17) or other dependents may lose out on $4,050 per person exemption.
On the other hand, the new law tries to offset the impact by increasing credit for qualifying children to $2,000 from $1,000 while introducing a new family credit of $500 for each dependent who is not qualifying children.
- “Qualified Business Income” deduction under Sect. 199A. Starting 2018, Internal Revenue Code, Section 199A, allows many owners of sole proprietorships, partnerships, S corporations and some trusts and estates, a 20% deduction of from a qualified trade or business under Section 162. Since it is a new regulation, there are conditions and limitations for this Section 199A deduction. Taxpayers who have small business operations may need professional helps in order to get the full potential tax benefits for such new deduction.
- Alternative Minimum Tax (AMT). The new law increases the AMT exemption by nearly 30% from 2017 exemption while making the exemption phaseout amount much higher ($1 million for married couples filing jointly vs. $160,900 in 2017). Thus, fewer taxpayers should be subjected to AMT in 2018.
With the elimination of the personal and dependency exemptions and home equity mortgage interest, and the introduction of the $10,000 cap on SALT and property taxes, many middle-class taxpayers are now less exposed to AMT. At the same time, they can claim for the AMT credits for AMT they paid in the prior years but subjected to the limitation on the amount claimed for the year.
For more information about the impacts on TCAJ, please contact our office at 917-660-3511 or email us at firstname.lastname@example.org