In these tumultuous tax times, my clients bombard me with questions. Many of their queries concern Public Law No. 115-97, aka the Tax Cuts and Jobs Act (TCJA), which President Trump signed on December 23, 2017.
Both supporters and opponents of the TCJA consider it to be the most comprehensive overhaul of the Internal Revenue Code since President Reagan signed the historic Tax Reform Act of 1986.
While my clients were happy because the centerpiece of Mr. Trump’s tax package was lower rates for individuals and corporations, I cautioned them it would be premature to uncork the bubbly.
I pointed out that the wide-ranging legislation did lots more than lower their rates. It also curtailed or eliminated many of their long-cherished write-offs, starting with 1040s for 2018 to be filed in 2019.
So then, clients ask, does the mix of lower rates and fewer, or diminished, deductions mean their tax tabs will increase or decrease? That kind of question, I tell them, doesn’t really have a precise answer. How things turn out depends on the kinds of income they receive and the deductions they claim.
What follows are highlights of some changes that particularly target millions of unsuspecting Americans who previously gained more by using Form 1040’s Schedule A to “itemize” their deductions than by using the standard amounts that are available only for those who don’t itemize.
Itemizers had become accustomed to submitting 1040s that claimed sizable write-offs for certain kinds of payments. The list includes interest on their home mortgages, state and local income taxes and property taxes, and charitable donations.
Here are two key areas to highlight when you're discussing the changes with clients:
Payments for Medical Care: The Internal Revenue Code already made it difficult for itemizers to deduct their outlays for such payments. The big barrier: Generally, unreimbursed payments are deductible only for the portion that exceeds a specified percentage of a person’s adjusted gross income (AGI).
For 2018 and 2019, the threshold is 7.5 percent. Starting in 2020, absent legislative action, the threshold becomes 10 percent, an increase of 33 percent. But 2020 is an election year, and there is bipartisan support in Congress to retain a hurdle of 7 percent.
However, a frequently overlooked exception will continue to be available for 2018 and later years for freelancers and other self-employed persons who make payments for health insurance: These aren’t subject to the thresholds.
Even better, freelancers can claim them, regardless of whether they itemize or use the standard deduction, the same way they’re allowed to claim contributions to IRAs and other kinds of tax-deferred retirement plans.
Fees for Return Preparation, Tax Planning and Fighting IRS Audits: The Tax Code similarly made it hard for itemizers to deduct such fees. Generally, they’re deductible only to the extent that they exceed 2 percent of AGI.
The TCJA ended deductions for such payments after 2017. However, it left unchanged long-standing rules that allow fee splitting for that portion of tax preparation and planning fees that are reasonably allocable to: Schedule C (profit or loss from business); Schedule E (income from renting vacation homes or other properties, royalties, partnerships and S corporations); or Schedule F (profit or loss from farming).
The act allows taxpayers to continue to use such fees on Schedules C, E or F to offset business, rental or farming income. The same goes when they pay fees to fight audits of related activities.
In subsequent columns, I’ll discuss more changes introduced by the TCJA, including the near doubling of the standard amounts.
Additional articles. A reminder for accountants who would welcome advice on how to alert clients to tactics that trim taxes for this year and even give a head start for next year: Delve into the archive of my articles (more than 275 and counting).
About Julian Block
Attorney and author Julian Block is frequently quoted in the New York Times, Wall Street Journal, and the Washington Post. He has been cited as “a leading tax professional” (New York Times), an “accomplished writer on taxes” (Wall Street Journal), and “an authority on tax planning” (Financial Planning magazine). More information about his books can be found at julianblocktaxexpert.com.