Tax Cuts and Jobs Act: 3 Common Questions

The Tax Cuts and Jobs Act (TCJA) was passed by Congress in a hurry late last year, and the IRS and tax preparers have been working to digest some of the more thorny issues created by the tax overhaul.

Associate Partner Julie Strohlein, CPA reveals that “In many cases, there are simply not enough details in the legislation itself to address all situations.  We will have to wait for additional IRS guidance for specifics on how to properly implement some provisions.”
 
 

3 Frequently Asked Questions

Five months after the new law was signed, here are the latest answers to a couple of the most common questions:
 

1) Is home equity interest still deductible?

The short answer is: Not unless you’ve used the money to buy, build or substantially improve your home.

Before the TCJA, homeowners were able to take out a home equity loan and spend it on things other than their residence, such as to pay off credit card debt or to finance large consumer purchases. Under the old tax code, they could deduct interest on up to $100,000 of such home equity debt.

The TCJA effectively writes the concept of home equity indebtedness out of the tax code. Now you can only deduct interest on “acquisition indebtedness,” meaning a loan secured by a qualified residence that is used to buy, build or substantially improve it. If you have taken out a home equity loan before 2018 and used it for any other purpose, interest on it is no longer deductible.

“CPAs will need to ask their clients how they used the loan proceeds.  There is nothing on the Form 1098 issued by the bank that indicates this.” – Julie Strohlein, CPA

2) I’m a small business owner. How do I use the new 20 percent qualified business expense deduction?

Short answer: It’s complicated and you should get help.

Certain small businesses structured as sole proprietors, S corporations and partnerships can deduct up to 20 percent of their qualified business income. But that percentage can be reduced after your taxable income reaches $157,500 (or $315,000 as a married couple filing jointly).

The amount of the reduction depends partly on the amount of wages paid and property acquired by your business during the year. Another complicating factor is that certain service industries including health, law, consulting, athletics, financial services and accounting are treated slightly differently.

“The IRS will need to change the  K-1 forms issued by S corporations, partnerships, and LLCs to include additional information not previously disclosed.  Now, the owner will need to know his proportionate share of wages paid by the company and also his share of the cost basis of the assets.” – Julie Strohlein, CPA

The IRS is expected to issue more clarification on how these rules are applied, such as when your business is a mix of one of those service industries and some other kind of business.

“Current shareholders of “C” corporations should quantify and consider the impact of converting to an “S” corporation to take advantage of the Qualified Business Income (QBI) deduction.” – Rich Middleton, CPA

Further Reading: Do I Qualify for the Qualified Business Income (QBI) Deduction?

3) What are the new rules about dependents and caregiving?

There are a few things that have changed regarding dependents and caregiving:

• Deductions. Standard deductions are nearly doubled to $12,000 for single filers and $24,000 for married joint filers. The code still says dependents can claim a standard deduction limited to the greater of $1,050 or $350 plus unearned income.

“There is still an additional standard deduction for taxpayers who are blind or at least 65 years old.  The amount varies depending upon filing status, but it ranges from $1,300 to $1,600.” – Julie Strohlein, CPA

“Someone on the threshold of the new standard deduction should consider bunching allowable itemized deductions every other year to maximize between the standard deduction and itemizing.” – Rich Middleton, CPA

• Kiddie Tax. Unearned income of children under age 19 (or 24 for full-time students) above a threshold of $2,100 is now taxed at the trust and estate tax rate.
  “In previous years, it was taxed at the parents’ rate.  The tax rates for trusts and estates reaches the top bracket of 37% at income of only $12,500.  In contrast, the parents’ rate wouldn’t reach 37% until their income exceeded $600,000.” – Julie Strohlein, CPA
• Family credit. If you have dependents who aren’t children under age 17 (and thus eligible for the Child Tax Credit), you can now claim $500 for each qualified dependent member of your household for whom you provide more than half of their financial support.
• Medical expenses. You can now deduct medical expenses higher than 7.5 percent of your adjusted gross income. You can claim this for medical expenses you pay for a relative even if they aren’t a dependent (i.e., they live outside your household) as long as you provide more than half of their financial support.

Consult with a Professional

Alloy Silverstein’s tax advisors are here to keep you up-to-date. Stay tuned for more guidance from the IRS on the new tax laws, and reach out if you’d like to set up a tax planning consultation for your 2018 tax year.

Visit our Tax Reform Resource Center →

 
 
The information contained in this newsletter is of a general nature and should not be acted upon in your specific situation without further details and/or professional assistance. For more information or for assistance with any of your tax or business concerns, contact our office at 856.667.4100.