As new tax laws come into effect, it’s always best to stay one step ahead of the game. Effective for 2018 tax year, is the Tax Cuts and Jobs Act of 2017. This tax reform has many provisions that impact both the employer and the employee. This article won’t cover every aspect of the new tax laws, however it will highlight some of the main updates.
Moving expenses under the former law allowed an employee to exclude qualified moving expense reimbursements from their gross income. The new act suspends the exclusion for qualified moving expense reimbursements for taxable years 2018 through 2025. This new change no longer allows for those reimbursements to be excluded from an employee’s wages.
Business Entertainment Expenses
Previously if an expense was incurred for an activity that was generally considered to be entertainment, amusement or recreation, it wasn’t deductible. The exception to this rule was if the activity was directly related to or associated with the active conduct of the taxpayer’s trade or business they could deduct 50% of those expenses. With the new tax reform, no deduction for business entertainment or recreation will be allowed, regardless if it is within the nature of the taxpayer’s conduct of trade or business.
Repeal of Deduction for Transportation Expenses
Under the old tax laws, employees reimbursed for qualified transportation fringes, such as parking and transportation by public transit, could exclude that from income. Under the new tax act, such exclusions are now disallowed.
Repeal of Certain Miscellaneous Itemized Deductions
In the former law, taxpayers were able to claim itemized deductions for certain miscellaneous expenses.
- Casualty and theft losses from property used in performing services as an employee.
- Business bad debt of an employee
- Business liability insurance premiums
- Damages paid to a former employer for breach of employment contract
- Depreciation on a computer of which an employer requires an employee to use in their work
- Dues to a chamber of commerce if that chamber helps the employee perform their job
- Dues to professional societies
- Home office or part of an employee’s home used regularly and exclusively in his or her work
- Job search expenses in the employee’s present occupation
- Legal fees related to the employee’s job
- Licenses and regulatory fees
- Malpractice insurance premiums
- Medical examinations required by an employer
- Occupational taxes
- Passport fees for a business trip
- Research expenses for a college professor
- Subscriptions to professional journals and trade magazines related to the employee’s work
- Tools and supplies used in the employee’s work
- Costs for travel, transportation, meals, entertainment, gifts and local lodging related to the employee’s work
- Union dues and expenses
- Work clothes and uniforms if required and not suitable for everyday use
- Work-related education
This long list of itemized deductions is no longer deductible for tax years 2018-2025. This is a significant change for many whom have previously used these deductions.
Many whom do not itemize their deductions will look forward to the changes in the standard deduction. The standard deduction has now doubled starting in 2018, the following is the breakdown:
- Single $12,000
- Head of Household $18,000
- Married Filing Jointly $24,000
With the standard deductions increasing, the personal exemptions have been phased out. This won’t impact small families, but those with 2 or more dependents will not receive a higher deduction as in past years. For example, a married couple filing jointly with no dependents, will receive the same standard deduction as a couple with 5 dependents.
Child Tax Credit
The Child tax credit, for children under the age of 17, has increased to $2,000 per child. This provision also has a higher phase-out threshold, $400,000 for married filing jointly and $200,000 for everyone else.
When looking over all the changes that the 2017 Act brings, it may have a significant impact on taxpayers because it eliminates several benefits that employers provided to their employees. While some have been eliminated, not all were. The reclassification of employees to statutory employees, or utilization of LLC or corporate entities, may enhance a taxpayer’s ability to deduct those items that the 2017 Act has eliminated.
In planning for this 2017 act, consulting with your current tax advisor is key to ensuring you are taking the right steps to avoid paying unanticipated taxes.
Source: (NATP Monthly, June 2018)