The Tax Cuts and Jobs Act (TCJA) has made sweeping changes to the United States tax laws. You have probably heard about some of the major changes that take effect beginning in 2018—a big cut to the corporate tax rate, lower marginal rates across the board, and a larger standard deduction. But there are some other less publicized changes that will still have a significant impact many taxpayers.
You may benefit from the lower rates or other benefits of the new tax laws, but then see an increase in your taxes due to one of these other changes. Every tax situation is different, so you will have to run the numbers or talk to tax professional to see how these five tax law changes will affect you.
1. Alimony Payments Are No Longer Deductible
Alimony payments were deductible by the payer and included in the income of the payee. The rule was typically a net gain to the divorced couple because the payer should have the higher income. The income gets diverted to the payee, who is in a lower tax bracket.
A payer cannot deduct alimony and the payee does not include the money in income. It will usually result in a higher overall tax payment by a divorced couple because the payer spouse should be in a higher tax bracket. This tax hike could impact alimony negotiations during a divorce and may actually cause the payee spouse to receive less in alimony.
There is one way around this change—separation agreements that are executed before the end of 2018 are not covered by the new law unless a modification is made that expressly states that the new law applies. Taxpayers who are in the middle of divorce proceedings may wish to expedite their negotiations in order to receive treatment under the old rules.
2. No More Miscellaneous Itemized Deductions
Miscellaneous itemized deductions were a subset of itemized deductions that included unreimbursed employee expenses, tax preparation fees, and certain other expenses. Specifically, the amount of these expenses that exceeded 2% of a taxpayer’s adjusted gross income was deductible.
The deduction for miscellaneous itemized deductions does not exist anymore. The biggest hit may come for employees who need to spend money on items for work. For example, uniforms, tools of the trade, or travel expenses.
The impact will probably be negligible for most taxpayers due to several factors. The change only impacts taxpayers who already itemize their deductions and have a large amount of miscellaneous itemized deductions, and the tax rate cuts could offset losses related to this new law. However, employees who spend a lot on unreimbursable work expenses will feel a sting from the loss of the deduction.
3. Taxpayers Have More Time to Get Back Levied Property from the IRS
If the IRS wrongfully levied your property, the amount of time you had to make an administrative wrongful levy claim varied depending on what was done with the property. If the IRS still had the property, you could make a claim no matter how much time had passed. But if the property had been sold, you only had nine months from the date of the levy notice to file a wrongful levy claim.
The period to file a claim for a wrongful levy has been extended to two years. Consequently, this new rule applies to levies made after December 22, 2017. If the IRS issued a levy before this date but the nine-month period had not yet expired, the new rule also applies.
4. Suspension of Dependent and Personal Exemptions
A taxpayer received an exemption for themselves as well as any qualifying dependents on their tax return. This exemption reduced their taxable income by the exemption amount. In 2017, the exemption amount was $4,050.
The new law suspends Personal and dependent exemptions. Other changes may mitigate the loss of this deduction, including:
- The increase in the standard deduction to $12,000 for single filers, $18,000 for heads of households, and $24,000 for joint filers
- The expansion of the child tax credit for qualifying children
- The family tax credit for dependents who are not qualifying children
- The reductions in the marginal tax rates
But some taxpayers will not receive enough benefit from these changes to make up for the loss of the deduction. Unfortunately, taxpayers who claimed dependents living in Canada or Mexico will not be able to take either the child tax credit or family tax credit. Furthermore, taxpayers with children who have ITINs, but not Social Security Numbers, will also not be able to take the child tax credit. They will be able to take the family tax credit for these dependents.
5. New Deduction for Pass-Through Business Income
Corporations weren’t the only businesses to get a tax break in the TCJA. Pass-through businesses—which include sole proprietorships, partnerships, and LLCs—now get a deduction worth up to 20% of qualified business income.
The deduction can benefit freelancers, independent contractors, and many other small business owners who are not “specified service providers.” Read our post on the details of how the pass-through tax deduction works for more information.
Prepare for Big Tax Changes With the Tax Cuts and Jobs Act
The TCJA will affect every taxpayer differently. You may want to change your tax withholding amounts or modify your estimated tax payments to account for these changes. In some cases, you may experience enough tax savings to start thinking about how you’re going to use the extra money.
As always, tax laws will continue to change. Most of these new laws expire within the next decade, and other new laws may take effect before then. Keep yourself up-to-date to make sure you know how federal tax laws are impacting your personal financial situation.