If you’re like most taxpayers, chances are you haven’t read The Tax Cuts and Jobs Act, which is understandable as the tax reform legislation is over 500 pages long and can be confusing and hard to understand for the average taxpayer. The good news is we’ve read through the new tax law and we can help you understand some of the major changes that will affect you and your business! Here is part three of our series of going through the different tax law changes and letting you know what the changes are and how they will affect you! Don’t forget to read Part 1 and 2 of the changes!
ACA individual mandate
While the Affordable Care Act (ACA) penalty will still apply for the 2018 tax year, the ACA individual mandate provision will be repealed for 2019. That means the (ACA) individual mandate provision requiring every eligible American to obtain health insurance or pay financial penalty when filing taxes has been permanently scrapped along with the penalty tax. The individual mandate repeal does not mean that the ACA is dead – health insurance marketplaces and provisions like coverage for children under 26 are still in place. But it does deal a massive blow to the long-term sustainability of ACA as it was based on ensuring enough healthy people buying health insurance (hence the penalty) to offset costs for providing subsidizing insurance to those who could not afford or were ineligible for employer sponsored insurance. The provision referred to as the individual mandate is what legally required most US citizens and legal residents to obtain private, employer sponsored or public health insurance (through state run exchanges).
In some divorce situations, one spouse or ex-spouse will be legally obligated to make payments to the other spouse. These payments could always be deducted by the payer for federal income tax purposes if they met the tax law definition. The recipient of the alimony would then have to report those payments as taxable income. This process is changing due to the Tax Cuts and Jobs Act. The process will remain the same for those who made alimony payments under a pre-2019 divorce agreement. But for those who make payments under a post-2018 agreement, your process will be very different.
For alimony payments required under a divorce that was executed after December 31st, 2018, the new tax law eliminates the old deduction for alimony payments. This also means recipients of the alimony payments will no longer have to include them in their taxable income. This change will prove to be very expensive for those who are required to make alimony payments.
There will be no change for pre-2019 divorce agreements, but for those payments to qualify as deductible alimony, payers must still satisfy the list of specific tax-law requirements. If the requirements are met, alimony payments can be written above-the-line on your federal income tax return, meaning you will not have to itemize to benefit from your deduction.
Employees who bike to work will be losing their tax benefits under the new law. Before the Tax Cuts and Jobs Act, employers could offer their employees tax-free commuting benefits of up to $260 per month to cover mass transit passes, parking fees and van-pooling expenses along with the $20 maximum for dedicated Bicycle commuters. The Tax Cuts and Jobs Act eliminated the employer-provided tax-free benefit. Beginning January 1, 2018, employers must include the value of bicycle commuting reimbursements in their employee’s income. If employers continue to offer the benefit, it will be taxable to employees. This however may not be a permanent change as the suspension is currently only applicable for tax years 2018 through 2025.
Gains made on home sales
The new tax bill has made several changes to capital gains, but luckily for taxpayers, there is still a mechanism where money made from selling a home can be excluded. The IRS has a provision that can help homeowners avoid capital gains on the sale of their primary residence. This provision allows taxpayers to exclude up to $250,000 of that gain from your income if you are a single filer. If you are filing Married Filing Jointly, you can exclude up to $500,000 from the sale. To qualify for the Section 121 exclusion, you must meet both the ownership test and the use test. You’re eligible for the exclusion if you have owned and used your home as your main home for a period aggregating at least two years out of the five years prior to its date of sale. You can meet the ownership and use tests during different 2-year periods, but you must meet both tests during the 5-year period ending on the date of the sale.
Miscellaneous tax deductions
Miscellaneous deductions are deductions that do not fit into other categories of the tax code. There are two types of miscellaneous deductions: Deductions subject to the 2% limit (allows you to deduct only the amount of expense that is over 2% of your Adjusted Gross Income, or AGI) and deductions not subject to the 2% limit. Miscellaneous deductions which exceed 2% of your AGI will be eliminated for the tax years 2018-2025. This includes deductions for unreimbursed employee expenses and tax preparation expenses. This also means expenses that you incur in your job that are not reimbursed like tools, supplies, required uniforms, dues, subscriptions and job search expenses are no longer deductible. It’s important to remember that this only affects taxpayers who claim an employee-related deduction on Schedule A. If you are a business owner, you typically file a Schedule C and so your business-related deductions are not affected.
Before Tax Cuts and Jobs Act, taxpayers could deduct the reasonable costs of moving household goods and personal effects, along with the travel costs of moving to the new home (excluding meals) if they qualified. But under the new tax law, moving expenses are suspended as a deduction. That means there is no longer a moving expenses deduction available to employees who are not reimbursed by their employers. This change goes into effect for tax years beginning after December 31, 2017, through December 31, 2025. The only exception to the new law is for taxpayers who are members of the military on active duty who move pursuant to a military order. If you moved during 2017, you can still deduct moving expenses on your 2017 tax return filed in 2018.
Personal casualty or theft
A casualty loss occurs when there is property damage from a sudden, unanticipated event, not from gradual, progressive damage. Examples of events qualifying as a casualty include: natural disasters like hurricanes, tornadoes, floods, storms, and volcanic eruptions; vandalism; fires; car accidents; theft; and attacks. Previously, taxpayers could deduct their losses on their tax return. Now under the Tax Cuts and Jobs Act, the itemized deduction for personal casualty and theft losses has been suspended. Before the Tax Cuts and Jobs act, losses were deductible to the extent they exceeded $100 per event. There is an exception to the changes made by the Tax Cuts and Jobs Act, that is when a taxpayer has a gain as a result of another casualty in which case the loss would be allowed to the extent of another casualty gain.
If you’re still confused about the tax law changes or aren’t sure how to adapt your finances or business to the new law, Polston Tax can help. Our team of IRS tax attorneys and tax accountants know all the changes with the new tax law and can help you understand what is best for your financial situation. Call us today at 844-841-9857 or click below to schedule a free consultation! You can also read about the other changes created by the Tax Cuts and Jobs Act here.