While the IRS has been working to implement the new rules and regulations brought forth by the Tax Cuts and Jobs Act (TCJA), my team and I have been reading and reviewing this major tax legislation to see how it will affect individuals and businesses.
Today I’m going to provide you with insight on what we believe to be the top 10 tax law changes that will impact your tax return in 2018.
1.) The 20% Deduction (199A Deduction)
Sole proprietorships, partnerships, and S corporations may be eligible for some or all of the new 20 percent deduction of qualified business income.
This deduction reduces your overall taxable income and won’t show up as a business expense as you might expect. Keep in mind your taxable income must be less than $315,000 if married filing jointly or $157,500 for all other filing types.
2.) Client and Prospect Business Meals
Taxpayers may continue to deduct 50 percent of the cost of business meals if the taxpayer (or an employee of the taxpayer) is present and the food or beverages are not considered lavish or extravagant. The meals may be provided to a current or potential business customer, client, consultant or similar business contact.
3.) Employee Meals
Employee meals are now 50 percent deductible.
This is a change from the 100% deduction that was available prior to 2018. This would apply to situations like taking your employees out to a birthday lunch or treating the office to a pizza party.
Entertainment is no longer deductible.
This probably won’t affect a whole lot of creative business owners because we aren’t usually taking potential clients out to sporting events or hitting up the golf course. However, if you’ve ever treated a client or prospective client to a concert, for example, this is no longer deductible.
Food and beverages that are provided during entertainment events will not be considered entertainment if purchased separately from the event.
5.) Hobby Deductions
Hobby expenses that don’t qualify as cost of sales are not deductible.
You had to itemize your personal deductions in the past in order to be able to take hobby deductions (not to exceed your hobby income). Now this option is gone. What does this mean for you? You need to turn any money-losing hobbies into a business with a profit motive.
What’s a profit motive? If you make more than you spend for at least three out of the last five years, the IRS will recognize this activity as a business instead of a hobby. If you happen to have a loss in four of the last five years, all hope is not lost. You can still prove that you tried to make a profit by doing the following:
- Keep good records! If you’re not on top of your finanicals, hire a bookkeeper to get you caught up.
- Have expertise in your field or hire those that do
- Putting time into it and documenting that time
6.) Home Mortgage Interest
For tax years 2018 through 2025:
- You can deduct interest payments on up to $750,000 in acquisition indebtedness for homes purchased after December 14, 2017.
- You can deduct up to $100,000 of home equity interest, but only if the funds are used to buy, build, or substantially improve the home.
7.) Itemized Miscellaneous Deductions
Itemized miscellaneous deductions are no longer deductible for tax years 2018 through 2025.
Some examples of the deductions that are gone include:
- Unreimbursed job expenses
- Union dues
- Dues to professional societies
- Expenses of looking for a new job
- Work clothes and uniforms
- Investment Expenses
- Investment advisory and management fees
- Fees for advice related to investing
- Safe deposit box rental fees
- Tax preparation fees for personal taxes
If you typically incur expenses related to work that haven’t gotten reimbursed in the past, you may consider talking with your employer about getting these reimbursed through the company.
8.) State Tax Deduction
State tax deductions on Schedule A are capped at $10,000.
Prior to 2018, if you had enough itemized deductions to exceed your standard deduction, you could file Schedule A to report those personal itemized deductions. One of those deductions was for state income taxes paid (quarterly state taxes and state tax withholdings from your paycheck), property taxes and sales taxes. You could deduct every dollar paid, with no cap.
Now, starting with the 2018 tax year, this deduction is limited to $10,000. This is a huge hit for high-income earners and those living in states with high property taxes.
9.) IRA Recharacterizations
You may no longer recharacterize a Roth IRA conversion back to traditional IRA status.
There are a few ways of getting money into a Roth IRA. One method is by converting a traditional IRA to a Roth IRA. When you do this, any untaxed funds will be subject to income tax. Well, what if the tax ends up being too high and you want to undo it? Prior to October 15, 2018, you could still do a recharacterization of 2017 Roth IRA conversions, but now that option is no longer available.
10.) Alimony Payments
For divorce agreements executed or modified after December 31, 2018, alimony is tax-free to the recipient and no longer deductible for the payor.
If you’re currently in the process of going through a divorce and would be the recipient of the alimony payments, it’s going to be very beneficial to you if you can finalize things after 2018 ends. The opposite is true if you’re expecting to pay alimony.
The changes made by the tax reform bill go into effect for the 2018 tax year, which means you’ll first notice them on your tax return that you file in 2019. There are many other rules and regulations that were implemented with this law, so to get a clear picture of how this will fully impact your individual taxes, please consult your CPA.