09 Oct Provisions You May Have Missed in the Tax Cuts and Jobs Act
The Tax Cuts and Jobs Act (TCJA) was signed into law on 12/22/2017. The 186 pages of reform were so broad that even as financial professionals we are still trying to grasp all the impacts to our clients. Although much has been made of the lower marginal tax rates, higher standard deduction, and limitations on SALT (State and Local Tax) deductions, there are several items that we found interesting and wanted to point them out to you. Here are some of the lesser publicized provisions in the TCJA:
1. Repeal of the Pease Limitation
IRC Section 68, also known as the Pease Limitation, limited the amount of itemized deductions that high income tax payers could take each year. In 2017 for couples with AGI more than $313,800 deductions were reduced by 3% of their income overage up to a maximum reduction of 80%. This effectively became an additional tax on the wealthy amounting to 1% or more. With the repeal of the Pease limitation itemized deductions are no longer at risk. Who benefits? High income families with significant deductions.
2. Kiddie Tax Rule Change
Prior to 2018, children (under age 19 or full-time students under age 24) were taxed at their parent’s marginal tax rate if they had unearned income (such as dividends, interest) over $2100. Under the TCJA, unearned income in children’s accounts is now taxed under the trust tax brackets. The Estate and Trust tax brackets are compressed, starting at 10% for unearned income under $2550, but quickly jumping to 24%, 35% and the top bracket of 37% at income over $12,500. Who benefits? Accounts with limited income and possibly smaller balances may actually pay lower taxes under the new law. However, lower- and middle-income families where children have large UTMA accounts could see an increase tax burden with rates going as high as 37%.
Currently when couples divorce the alimony paid by one spouse is deductible to them and taxable income to the recipient. For divorce agreements after 12/31/18 this has been significantly changed. Alimony payments will no longer be deductible, and the income received is not reportable. For those contemplating a divorce currently this is a big issue. Who benefits? The new law benefits the recipient and removes a sizable tax deduction from the payor. One could expect to see a flurry of divorce activity this year before the new tax treatment goes into effect.
4. 1031 Exchanges Limited
IRC Section 1031 (also known as like-kind exchange) allows you to postpone paying taxes on a sale of investment or business property when you reinvest the proceeds in a similar property. There are complicated rules to follow, but the tax benefits are significant. Prior to the TCJA the 1031 exchange was used for investable assets like machinery and equipment, artwork, franchise licenses and patents, livestock, classic cars, airplanes or boats. Under the new tax laws, a like-kind exchange will only apply to real estate. Who benefits? Those involved in real estate transactions for business use.
5. Moving Expenses
This above-the-line deduction has been eliminated. The TCJA repealed the moving expense deduction and furthermore made employer reimbursement of moving expenses taxable as income. Who benefits? The only category that was carved out was active duty military personnel who move pursuant to a military order.
6. Family & Medical Leave Act Tax Credit
Employers who offer paid family medical leave will have a little help from the government in terms of a tax credit. The TCJA provides employers with a business credit of 12.5% -25% of the wages paid during the leave provided the employee is paid at least 50%-100% of their normal wages. This incentive is in place for 2018 and 2019. Who benefits? Employers who participate and employees who get up to 12 weeks paid leave will both benefit from this.
7. Sexual Harassment Settlements
Perhaps in a nod to the “me too!” movement, the TCJA has removed the tax deduction that businesses have been allowed to take when settling a sexual harassment or sexual abuse claim if the payments are subject to a nondisclosure agreement. Who benefits? Employees may benefit from the additional financial pressure that this places on businesses who will have an added incentive to control harassment in the workplace.
8. 529 Plan Accounts
Families who are saving for college have long used 529 Plans to provide tax free growth. The original mandate of the 529 was that the distributions from these accounts would be tax-free if they were used for qualified higher education expenses. The TCJA expanded this to include expenses for elementary or secondary public, private or religious schools up to $10,000/year. Who benefits? Families with children enrolled in private schools.
9. REIT Income
Real Estate Investment Trusts, or REITs, have always been an interesting investment vehicle for individuals looking for income. REITs are required to distribute 90% of their taxable income each year which typically comes from interest on mortgages, rents, etc. in the form of dividends. Under the TCJA there is a new provision which provides for a 20% pass-through deduction for qualified business income; although much of the discussion about this has revolved around S-Corps, LLCs and partnerships, this also applies to REITs. Who benefits? REIT shareholders will receive a deduction of 20% of REIT dividends that they receive, which effectively lowers their tax rate from a maximum of 37% to 29.6% on this income.
10. Marriage Penalty
There have been attempts to eliminate the inequalities in the tax code in the tax brackets applied to individuals vs married couples. In the final version of the TCJA the marriage penalty was removed for all brackets EXCEPT the top tax bracket of 37%. Individuals reach the 37% bracket at a taxable income of $500,000, whereas married couples hit this at only $600,000. Who benefits? Taxpayers below the $600,000 threshold will now be treated equally in terms of their marginal tax rate.