A look at the provisions of the Tax Cuts & Jobs Act (TCJA) that will affect families – whether or not they are in a state of dissolution.
By Jerome M. Newler, Certified Public Accountant
On December 17, 2017, the President signed into law the new tax act, most of which takes effect on January 1, 2018. Unfortunately, most of the new law had not even been reduced to writing at the time of signing. As a result, the first “draft” was not drawn until late January 2018. That draft is and has been subject to re-writes and technical corrections – including, but not limited to, the new IRC Section 199A, which deals with the “Qualified Business Income deduction,” aka “QBI.” Even at this writing, the IRS has not drafted the proposed regulations let alone the general rules.
Accordingly, while many of the attorneys and CPAs in the tax community have their own versions, interpretations, and speculations as to how this will all work, and we’re all hand-tied until the IRS takes action. This subject will be addressed in a subsequent article. For now, the AICPA has addressed the Treasury Department as well as the IRS on several concerns and challenges – including, but not limited to, the urgency for guidance during the interim period regarding how to calculate and employ the 20% deduction (not to be confused with a tax credit).
So, let’s take a look at the provisions of TCJA that affect families whether or not they are in a state of dissolution. Also, please note that while many of the changes are hard and fast, they do not produce a cookie-cutter answer – meaning that the solution depends on all of the facts and circumstances
in each case.
From this point forward, all comparisons and calculations are based on a status of MFJ (married filing jointly) and no other taxes or credits.
How the TCJA Affects Families
There are still seven tax brackets with “minor” changes. Under 2017 law, a married couple with taxable income of less than $18,650 incurred $0 for their income tax liability. Under 2018 law, the same couple would have an income tax liability of $1,865. A married couple with taxable income of $470,700 would have a 2017 tax liability of $131,628 whereas the same couple in 2018 would have a tax liability of $116,124; that’s a decrease (savings) of approximately $15,000. But let’s take a look at what the TCJA has done to the mathematics of getting to taxable income.
- First, there are no personal/dependency deductions at $4,050 each; a family of four now has $16,200 of more taxable income in 2018.
- Second, the deduction for personal home mortgage interest is limited to acquisition costs up to $750,000 (which used to be $1,000,000); the deduction for equity loans was $100,000 and is now not allowed at all until 1/1/26 (unless used for home improvements).
- Third, deductions for any and all state and local taxes (SALT) are limited to $10,000 until 1/1/26.
- Fourth, anything that would have qualified as a miscellaneous itemized deduction (i.e. subject to the 2% AGI limitation) is no longer deductible until 1/1/26; this category includes (not necessarily a comprehensive listing):
- legal fees of any kind,
- accounting fees of any kind,
- brokerage/investment fees of any kind,
- bank fees of any kind,
- business expenses (travel, entertainment, transportation, dues, uniforms, automobile mileage or direct costs, automobile lease expenses, moving expenses, business educational/seminar/convention expenses, gifts, office supplies, cell phones, and other electronic devices, etc.).
A more relevant example is to take a married couple with two children and a taxable income of $165,000. In 2017, their tax liability (using the same assumptions as above) would have been $33,085, but in 2018, the same taxable income would generate a tax liability of $28,179. Here are two thoughts about this result.
First, assume that: a) medical deductions are minimal, b) charitable contributions are $1,000, c) state and local income taxes are $25,000, d) mortgage interest is $10,000, and miscellaneous employment-related expenses including tax preparation fees are $5,000.
In 2017, their total deductions from AGI (adjusted gross income) would be $57,200; that means that their gross income (wages, dividends, interest, etc.) would be $222,000. In 2018, they would wind up taking the (new) standard deduction of $24,000, which is substantially less than the 2017 itemized deductions with the personal exemptions. In order for their tax liability to be reduced to $28,179, their gross income could only amount to $189,000 – that’s $33,000 less in income in order to pay $4,906 less in taxes. If they actually maintained their gross income of $222,000, they would then wind up incurring an additional $7,920 in 2018 tax liability, which would then total $36,099. This means that they would be paying $3,014 more ($36,099-33,085) in 2018 than they did on the same amount in 2017. My grandfather used to tell me that liars can figure but figures don’t lie!
How the TCJA Affects Families: Alimony
One more issue – alimony. Any alimony arrangement whether by agreement or court order entered into after 12/31/18 will not be deductible to the payor nor will it be includible by the recipient. No exception. For those matters still in the “pipeline,” bifurcation may be better than nothing. Finally, there does not seem to be a consensus on modifications to pre 1/1/19 alimony arrangements. It is clearly not clear that including a provision for a change in the amount being paid in a settlement agreement would allow the prior law to prevail; i.e., if the amount changes, but the agreement does not, will the alimony still enjoy pre-TCJA tax treatment?
Jerome Newler (CPA/CFF/CGMA) possesses nearly 40 years of accounting experience, particularly in the areas of Trust and Investment (Fiduciary) Accounting, Income Tax and Small Business Accounting, and Business Valuations & Forensic Accounting. A Certified Public Accountant who is also Certified in Financial Fraud, Mr. Newler has earned an excellent reputation throughout the accounting and legal industries. www.cpadivorce.com
Do you expect the IRS to publish regs to clarify whether modifications of pre-2019 alimony will qualify for taxable treatment?
Many thanks, Julia
I am very sorry that I did not get around to replying to you earlier and now your question is moot. In short, the IRS didn’t.
My excuse is that during December I was putting in incredible amounts of hours – you know, the 11th hour kind of stuff. As a result, I hadn’t gotten around to get back to the site until now (1/17/19). If you still have any questions, please feel free to get back to me; I promise a more timely response.