In this episode, Dr. O’Neill recaps some of the key points of discussion in the January 15, 2019 webinar, Tax Cuts and Jobs Act of 2017 which was presented by Andrew Zumwalt and covered the changes implemented by the new tax law in 2017. Watch the recording, view the presentation slides and find supplemental resources from this webinar here.
What are some of the biggest changes to income tax filing as a result of the Tax Cuts and Jobs Act?
There were lots of changes that we talked about on the webinar. Probably the biggest one is that the standard deduction for single and married couples filing jointly has almost doubled. The best estimates now are that only about 10% of taxpayers will benefit from itemizing their deductions because the standard deduction will be higher for them since it’s increased so much. Also, we have lower tax rates- lower than they were in 2017- and this will continue through 2025. For example, the old 15% tax rate is now 12%. There are no more personal exemptions, which of course decreased the amount of income on which taxes were paid. Exemptions have gone away for eight years. Casualty loss deductions are limited to a natural disaster declared by the president of the United States. For example, if somebody’s house burns down, you’re kind of out of luck. It’s not a natural disaster. If somebody is part of a tornado, flood, hurricane, or something like that and it qualifies as a declared natural disaster, then they would be able to deduct their unreimbursed losses on their tax return. Another thing that was discussed was the new qualified business income deduction. This is a 20% deduction for people who have what they call pass through income, which comes from either an LLC, a sole proprietorship, or a partnership. This was done basically to give some parody to small business owners in consideration of the tax cuts that were given to large corporations. There’s a $10,000 cap on the so-called SALT deductions. SALT is an acronym for state and local taxes. For example, in New Jersey it’s not uncommon for some people to pay $20-25,000 of property taxes in some of our larger, urban areas. They’re only going to be able to write off $10,000, which of course will have the effect of reducing the number of people who can itemize. Also, another thing that kind of affects our service members is that moving expenses are no longer deductible, but there was an exemption that was put in for service members who are on a PCS (permanent change of station). They will be able to deduct their expenses relating to the moving and the storage of their possessions during a PCS move. Those are some of the biggest highlights.
Are there other tax law changes that affect people based on their health and relationship status?
Oh yeah, they packed a lot of tax stuff into this tax law. In fact, they said that this is the largest mass change in the US tax code in 30 years. You’d have to go back to the 1980s to have a tax law that affected so many moving parts to people’s income tax. Let’s look at health and relationship status. The child tax credit is now $2,000. It had been $1,000, and $1,400 is refundable, which means that you can get money back even if you have no tax liability. There’s also a $500 non-refundable credit for other dependents. For example, you have an 18 year old child who has aged out of being qualified for the child, but they’re a dependent. This is partially to make up for the loss of the exemptions for people who would have been claimed previously under the older tax law. Also, for all divorce decrees that were executed as of January 1st of this year, alimony is no longer deductible by the person who pays it, and it is no longer taxable to the recipient spouse. It just doesn’t factor into people’s tax situation anymore as far as divorce goes. Every tax filer who gets a standard deduction now…because we have the standard deduction, we don’t have the exemption, so there’s gonna be fewer issues with people who are double-claiming. It was not uncommon for both parents to want to claim the children, and then there was a double claiming of the same kids. Those kind of issues are avoided. Starting in 2019 (but it doesn’t affect your taxes from last year that we’re working on now), there’s no longer a penalty due if individuals don’t have health insurance. If you didn’t have health insurance last year, you still have to pay a penalty on your 2018 return, but the penalty goes away in 2019.
There’s a new income tax form for 2018. What does the 1040 form for the IRS look like?
If you can remember back in the last presidential campaign, there was talk of having a tax return look like a postcard. It came pretty close. It’s kind of like the size of a large postcard, but again, keep in mind that most people don’t do paper returns. Most people are filing electronically. If you decide to file on paper, it’s going to be the size of a half of an 81/2 by 11 sheet of paper, and there’s a front side and a back side. However, if you have a complex situation with you finances, there are also six new forms- they call them schedules 1 to 6- that are in addition to the previous schedules that we had (i.e. A, B, C, D, F, and SE). We’ve got lettered schedules, and we’ve got numbered schedules. In reality, what’s happening is that people who have very simple tax returns, this new 1040 form will be easy to complete. Everybody will have to fill out the new 1040 form because the 1040EZ and the 1040A that we had previously for people who had simpler tax filings have gone away. Everybody has to use the 1040. If you have a simple tax life, it probably will be pretty easy. If you have pretty complex finances, it’s probably not going to feel any different than before because a lot of the lines that they took off the 1040 form to make it fit a half a page versus a full page have just ended up on the schedules 1 to 6. It’s not really making people’s tax filing any simpler. It’s just a different format and a different way that the computations are made. The front page of this new 1040 has all of the written information. That’s where people are going to put their name, address, social security number, number of dependents, filing status… all that written information. The back page is where you have all the numbers. That’s where people are going to have their income, deductions, taxes, tax credits. Again, a lot of the information that’s going to be fed to the back of that form is going to be also on those new schedules 1 to 6 that I mentioned before. There’s also a new worksheet to calculate the new 20% deduction for qualified business income. Taxpayers don’t actually file this new form. It’s more like a worksheet, but they have to keep it with their tax records in the event of an audit. Interesting enough with the new forms, they kind of resemble the old form, but they have several lines that say reserved on them. I guess Congress always had the prerogative to perhaps pass some clarifying legislation, and the IRS kind of wanted to hedge their bets and have lines available if needed. When you see those, it looks kind of strange because you’re kind of saying, “Reserved for what?” You don’t have to worry about that. It’s just that they had to print the forms by a certain date, and they wanted to leave themselves the option of having some extra space, so that’s in there as well.
Was there any other helpful information that was shared on the webinar?
Oh yeah, there’s a lot of information. First of all, the due date is actually April 15th. Some years it kind of floats around. If April 15th is on a weekend, they give a few more days. People who live in Maine or Massachusetts have a deadline of April 17th. That has to do with some holiday that they have. People who can’t get it done by April 15th can automatically extend their filing of their return to October 15th. They have to file a form (4868) and send it to the IRS by April 15th. Again, you’re just extending the time to file the return, you’re not extending the time to make payment. You kind of have to do a best guess estimate anyway because if you’re going to be underwithheld or owe taxes, then you’ve got to pay that up in April. In fact, there have been some news reports just this week on some of the early tax filings. People are grumbling online on social media that they’re not getting funds that they expected. All tax forms and schedules are available for downloading. If people do want to file a paper return, they would go to IRS.gov. It was also noted that gambling expenses are still deductible. If you’re lucky enough to win something and you want to have some offsetting expenses, you can still deduct those; however, unreimbursed employee business expenses are not. If you don’t get fully reimbursed for your mileage, travel expenses, or anything like that from an employer, you can’t take those off on your tax return either, so you’re kind of paying them out of pocket so to speak. Also, it was emphasized on the webinar that different increments of income are taxed at different rates. Even though you might be in the 10% rate or 22%, you don’t pay tax on all of your income at that highest rate. It’s just the last dollar of income, and then there’s different ranges of income that fall into the different tax rates. There are seven tax break rates from 2018-2025, and they range from 10-37%. The other thing that was mentioned is that the tax law has what they call a sunset clause in it that was put in there in order to meet certain budget deficit calculation things that Congress has. If Congress does nothing to amend or extend the Tax Cuts and Jobs Act or pass a new law, then tax rules will go back to the way that they were in 2017. Then we get back to all the old rules and old tax brackets, and everything else goes back to the way it was before.
What military-specific tax information is important for financial educators and counselors to know?
The speaker mentioned the IRS publication 3, which is called Armed Forces Tax Guide, as being a real good source of information for military families. He also noted that service members who are serving in a combat zone receive an extended time to file their income taxes. That time is calculated by the time left in the tax filing season plus 180 days. The clock starts ticking on that 180 days, on the last day that people serve in that hazardous duty area. As I mentioned before, moving expenses related to a permanent change of station move are still deductible for military families. That applies in three situations. It applies from your home to your first post (so if you’re just entering the military basically), between your PCS posts (which could be your entire military career going from one place to another), and then your last post back to your home when you end your military career. There’s three different times when people can have those expenses itemized and deducted if they’re in the military. Also, he mentioned that certain reservist’s expenses are deductible such as travel more than 100 miles away to drills and reserve meetings that people are required to attend. The last thing that he mentioned is something that’s pretty sobering obviously because it involves the death of a service member. It was pointed out that there’s such a thing as the HEART Act and CAP, so I’m assuming that’s an acronym for something. What was mentioned is that when a service member passes away, there is a $100,000 death gratuity. Also, if they have the maximum life insurance benefit of $400,000, that’s $500,000 (half a million dollars). That can roll straight to a Roth IRA, and then no tax is due on the $500,000. Then the earnings grow tax-free, and the qualified withdrawals are tax-free. That’s a great financial benefit. Obviously, it’s a very bitter-sweet one because it comes with the death of a service member, but it is a way to extend those resources because Roth IRAs have all sorts of potential for stretching between generations. People can take advantage of that benefit.
The HEART Act stands for Heroes Earnings Assistance and Relief Tax Act.