The TCJA is complicated and its impact on individual taxpayers will vary, based on their personal situation and even the State in which they reside in. In this blog, I’ll talk about some of “The Good, The Bad, and The Ugly” provisions of the new 2017 Tax Cuts and Jobs Act aka TCJA being debut starting with the 2018 tax filings. It is the biggest federal tax law change in over 30 years. Besides its intended “tax cuts” that is open for debate, the other intent was to simplify the tax filing process for millions of taxpayers. According to the Tax Foundation’s Key Findings:
- The Tax Cuts and Jobs Act of 2017 made several significant changes to the individual income tax, including reforms to itemized deductions and the alternative minimum tax, an expanded standard deduction and child tax credit, and lower marginal tax rates across brackets.
- These changes simplify the individual income tax for millions of households, as 28.5 million filers would be better off taking the newly expanded standard deduction, instead of itemizing various deductions, reducing compliance costs.
- The Internal Revenue Service estimates the average time to complete an individual tax return will decrease by 4 to 7 percent. Converting this to dollar terms, we estimate compliance savings could range from $3.1 billion to $5.4 billion.
- Under the new tax law, new limits apply to some itemized deductions, including deductions for state and local taxes paid and mortgage interest, which broadens the tax base and reduces distortions in the tax code.
- The individual income tax changes are scheduled to expire after December 31, 2025. If permanent, the income tax provisions would reduce federal revenue by $165 billion per year on a conventional basis, but when incorporating economic growth and feedback, on a dynamic basis, they would reduce federal revenue by $115 billion a year.
However, upon closer look and application to reality, it’s a mixed baggage of “the good, the bad, and the ugly.” With that said, I’ll outline some of the highlights worth noting. Also note that the US tax laws remain vast and complex, drowning in many provisions, exceptions, limitations, letter rulings, and revenue codes which at times seem like literally written in codes not meant to ever be decoded. So here goes…..
The Good. The standard deduction was nearly doubled from $6,500 to $12,000 for individual filers, and $13,000 to $24,000 for joint filers. With the standard deduction larger, the value of itemized deductions decreases for many taxpayers – simply put there’ll be less itemizers come tax time.
For example, a joint filer who previously took $12,000 in various itemized deductions would now be able to take the $24,000 standard deduction. This new provision allows them to deduct an extra $12,000 avoiding the time consuming and labor intensive work of saving receipts and filling out Form 1040 Schedule A.
Other favorable provisions are increased child tax credit from $1,000 to $2,000 per qualified child under the age of 17, and higher phase-out threshold from $110,000 to $400,000 thus making many households qualify. Also, unlike prior years, many won’t be hit by the alternative minimum tax (AMT) as exemption and phase-out range have increased as well. The AGI limitation for charitable contributions was increased from 50% to 60% which means higher deductible amount for those who itemize and donate significantly. These are just some of the many changes that provide the most benefit in this new federal law tax change.
The Bad. The TCJA limited two main itemized deductions, state and local taxes paid (SALT) and the mortgage interest, which favored the residents of high taxes and high real estate value states the most. Previously, taxpayers could deduct the entire amount paid for state income tax along with the state and local property taxes paid. With the new law, however, itemizers are limited to deducting a total of $10,000 among state and local property, sales and income taxes paid. In addition, $750,000 limit (down from $1,000,000) for mortgage interest on new qualified home acquisition debt (originated after December 15, 2017). Home equity loan interest is no longer deductible except for a limited amount to buy, build, or improve the home that secures the loan.
Other previous provisions that were eliminated are moving expenses, alimony, and miscellaneous itemized deductions subject to the 2% floor, to name a few. The moving expense deduction and income inclusion is now only allowed to members of the Armed Forces and immediate family. The personal casualty loss and theft deductions are also eliminated unless the loss is incurred in a federally declared disaster area.
The Ugly. I would say that just like beauty, this part is in “the eye of the beholder” as each taxpayer’s situation is different. Some may benefit more with tax savings and advantages, while others may be put in a less than ideal result with limited benefit or even lost deductions from income.
Let’s illustrate this point with alimony. With high-net worth individuals who are headed for divorce court, settlement agreements were used as part of a tax planning strategy. The high-earner payer would be able to claim alimony as a deduction thus reducing taxable income. On the other hand, the recipient would have to recognize the payment as income. However, for agreements entered into after December 31, 2018, alimony payments are no longer deductible by the payer nor includible in income by the recipient. So in this scenario, who has a better deal and who would consider this new provision to be “ugly?” The one who pays but no deduction from income benefit or the one who receives but no taxable income to report? Again, the answer is in the “eye of the taxpayer.”
These are just a few of the many different aspects of “the good, the bad, and the ugly” of the TCJA changes at the Federal individual level. Be sure to be aware that many States may or may not conform to these changes as in the case of California, which is known for its long list of non-conformity. Businesses such as partnerships and corporations, big and small, present another layer of complexities and set of rules too broad to cover or discuss in this blog. Maybe it would be for another one….so stay tuned.
I’m a CPA who assists individuals, entrepreneurs, and small businesses navigate the complex world of tax compliance along with other business issues through planning strategies or ideas. It’s essential that entrepreneurs stay focused on their own key craft and achieve a more balanced approach to any pursuits.
Besides helping clients, I’m a blogger who enjoys writing useful and relevant contents. Check out my other blogs or the tab under Tax Resources for more information on the recent tax law changes. You can also Connect with me here to schedule a free 30 minute consultation about your tax situation. #SimplyComplicated #SanDiegoCPA #JustGetBalanced!