Tax Reform is Confusing Part 2

Do you struggle feeling Tax Reform is confusing?

Yes, tax reform is confusing. In part 2 we hope to shed light on other areas of tax reform changes. As mentioned last week, we decided to put together a side-by side comparison of the old and new law. At the end of Part 1’s blog post, is an infographic to help you maneuver all the details behind Tax Reform. Below we will break down Part 2 of this very long infographic for an easier understanding. Let’s go!

Above-the-Line Deductions

Teachers’ Deduction

Tax Reform is Confusing, Above the line deductions, Teachers' DeductionThere has been not change to the Teachers Deduction. The teacher deduction remains at $250 for classroom supplies and professional development courses. We personally believe teachers deserve much more than that, since we know they put a lot of personal investment in their classrooms.

Moving Deduction and Reimbursements

Under Tax Reform, the Moving Deduction and Reimbursements has been suspended. The exception is for military who change stations. Other than military, any employer reimbursement will have to count all reimbursements as taxable wage income. This was not the case before tax reform. It use to be that any commute 50 miles further from the taxpayers place of employment qualified and was excluded from the employee’s gross income.

Alimony

Nobody likes getting a divorce. Now you have even more reason. In the past, the person paying alimony was entitled to claim an above-the-line deduction for qualifying payments; then the the person receiving the alimony reports the income.

Starting January 1, 2019 if you get a divorce or your divorce is subject to a modification, alimony will not long be deductible by the payer and the recipient will no longer have to claim it as income.  This is true even if the divorcees amend a previous modification.

Performing Artists Expenses

Hey all you artists out there! You are safe for now! The House wanted to paint an ugly picture for you by repealing this deduction. However, the conference agreement retains it in its current form.What is the current form for Performing Artists Expenses?

An employee whose AGI of %16,000 or less may deduct their performing arts expenses that exceed 10% of AGI as an above-the line deduction. Also, any artist who works for more than one employer in the performing arts field who receives $200 will also be under this rule.

Government Officials’ Expenses

Tax REform is confusing, Above-the-line Deductions, deductions, Government Officials' Expenses

The government is always good to itself, isn’t it (especially when it comes to their own pockets)? There was no change here either. The House Bill was twarted by the conference agreement.

So it stands, an official is is paid on a fee basis as an employee of a state or local government may claim expenses. This means any expenses with respect to government-specific employment may claim the expenses as a deduction in calculating AGI.

Employee Fringe Benefits

Bicycle Communiting

Tax Reform is Confusing, Employee Fringe Benefits, Bicycle CommunitingFor those health-conscious bike riders out there, your tax free monthly compensation is no longer applicable. That’s $20 a month in tax free compensation. It doesn’t sound like a lot, but it adds up. So it looks like you are riding your bike because you really believe it is the right thing to do. You should still feel proud that you are doing your part shrinking your carbon footprint.

Employer Provided Housing

Tax Reform is Confusing, Employer Provided Housing, Employee Fringe BenefitsThere is good news for employees who have employer provided housing. One one condition, you have to in the housing because it makes it easier on the employer. There is no change here.

Dependent Care Assistance

Fortunately, this didn’t change much. Qualified adoption expenses are sometimes paid for by the employer and then the employer could include it above-the-line. Also, the employee didn’t have to claim it as income, which was a nice gesture. The House Bill would have taken it way, but the conference agreement has kept it. There was even an increase from $13,570 to $13,840. So, the employee may still exclude a maximum dollar amount of $13,840 for any qualifying adoption expense. Higher-income tax payers will note there is a phase-out of the exclusion.

Tax Rates

For 2018 there will continue to be seven tax brackets, but at different rates and thresholds. The rates are now 10%, 12%, 22%, 24%, 32%, 35% and 37%. Below is 2018 rate changes from 2017. It would seem that the middle class will receive the biggest percentage reduction, but we will let you be the judge of that.

  • 10% from 10% (no change)
  • 12% from 15% (-3%)
  • 22% from 25% (-3%)
  • 24% from 28% (-4%)
  • 32% from 33% (-1%)
  • 35% from 35% (no change)
  • 37% from 39.6% (-2.5%)

Identifying Shares Sold

The final bill does not require using FIFO (first-in, first-out) method for selection of shares sold. Originally, the Senate did. In 2017, under current tax law a taxpayer who disposes part of their shares they hold in a corporation that were acquired at different times and different prices could select what shares are considered sold. With the provision that the shares had to be reasonably identified.

Child Tax Credit

In 2018 there was no change to the “Under Age 17” requirement. In fact, the child tax credit refund was raised to $2000 from $1400 per qualifying child. However, the credit phases out for those taxpayers earning over $200,000 annually ($400,000 for married filing jointly). These thresholds do have an inflation adjustment.

The other requirement is that the child number have a Social Security Number. The other requirement is the the number must have been on issue prior to the due date of the return to qualify for this credit.

Non-Child Dependent Credit

In the past, there was never a credit provision for non-child dependents. In 2018, there is a $500 non-refundable credit for non-child dependents. Note that the same phase out rule applies as in the Child Tax Credit above.

Alternative Minimimum Tax (AMT)

The only change here is that all exemptions have increases.

  • $109,400 for Married Filing Jointly
  • $54,700 for Married Filing Separate
  • $70,300 for Single and Head of Household

The exemption phase-out thresholds are up too: $1 Million for Married taxpayers filing jointly and $500,000 for others.

Tax reform is Confusing, and we are here to help!

Problem Solution, Question mark, HelpOh, there is a lot more we have to help you understand. In our next blog we will address Education Provisions. After that, comes Home Sale Exclusion, Traditional to ROTH IRA conversions, Estate and Gift Tax, and like we said, a lot more! So hold on to your seatbelts, tax reform has a long ride for you! Call Alex Franch, BS EA,  at 781.849.7200 or email us at contactus@worthtax.com. You may also make an appointment at any one of our locations in DedhamWeymouth, and Norwell to develop a tax planning strategy.

Alex Franch, BS EA

Alex is a Tax Specialist and Partner at Joseph Cahill & Associates / WorthTax. He has a diverse background including a Bachelor of Science from Boston College in Mathematics and extensive military service. Alex is an Enrolled Agent and has a decade of tax preparation experience. He is passionate about serving businesses with tax and financial planning

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