Char­i­ta­ble con­tri­bu­tions. Im­por­tant changes for the 2019 tax re­turn fil­ing sea­son

Accounting Today - - Taxpractice - See STRAT­EGY on 17

In­di­vid­ual changes

Stan­dard vs. item­ized de­duc­tions. The in­crease in the stan­dard de­duc­tion likely means that many more tax­pay­ers will be bet­ter off with the stan­dard de­duc­tion in 2018. That will mean sim­pli­fi­ca­tion for many more tax­pay­ers, but they still may not be happy if they did not know about it and did not pre­pare for the loss of item­ized de­duc­tions dur­ing 2018.

Med­i­cal ex­pense de­duc­tion. The thresh­old for the med­i­cal ex­pense de­duc­tion is low­ered to 7.5 per­cent of ad­justed gross in­come for reg­u­lar tax and Al­ter­na­tive Min­i­mum Tax pur­poses. It re­verts back to 10 per­cent in 2019.

The SALT cap. The state and lo­cal tax de­duc­tion is capped at $10,000. This in­cludes both state in­come or sales taxes and prop­erty taxes. State ef­forts to do work­arounds for the limit through state char­i­ta­ble con­tri­bu­tions with state in­come tax cred­its may not work due to IRS pro­posed reg­u­la­tions lim­it­ing the char­i­ta­ble de­duc­tion to the ex­tent of any state or lo­cal tax cred­its. This also im­pacts pre-ex­ist­ing state char­i­ta­ble con­tri­bu­tion pro­grams. If the tax­payer can al­lo­cate part of the SALT to a busi­ness, that por­tion es­capes the cap.

Casualty loss. There is no casualty loss de­duc­tion un­less for a fed­er­ally de­clared dis­as­ter. The tax­payer is re­quired to in­clude the FEMA num­ber and the lo­ca­tion of the prop­erty when claim­ing loss de­duc­tion.

The de­duc­tion limit is in­creased to 60 per­cent of AGI. There is no de­duc­tion if the con­tri­bu­tion se­cures ath­letic event seat­ing rights. Tax­pay­ers will need con­tem­po­ra­ne­ous sub­stan­ti­a­tion for any con­tri­bu­tion of $250 or more, even if the char­ity has re­ported the con­tri­bu­tion to the IRS.

Mort­gage in­ter­est de­duc­tion. Be care­ful of any mort­gage mod­i­fi­ca­tion that in­cluded cash out, even if just for clos­ing costs — it may re­sult in loss of the grand­fa­thered $1 mil­lion debt limit and be­come a $750,000 debt limit. No home eq­uity in­ter­est de­duc­tion can be claimed un­less the tax­payer can doc­u­ment the ex­penses to buy, build or im­prove the home.

Mis­cel­la­neous item­ized de­duc­tions. The de­duc­tion for mis­cel­la­neous item­ized de­duc­tions sub­ject to the 2 per­cent of AGI floor was re­pealed through 2025, in­clud­ing un­re­im­bursed em­ployee busi­ness ex­penses, in­vest­ment ex­penses, tax prepa­ra­tion fees, and hobby ex­penses.

The 20 per­cent de­duc­tion for own­ers of passthrough busi­nesses.

The de­duc­tion is claimed on the new Line 9 on the draft Form 1040. There is a need to de­ter­mine qual­i­fied busi­ness in­come, and tax­pay­ers may also need to de­ter­mine if theirs is a spec­i­fied ser­vice trade or busi­ness, if there are W-2 wages, and the un­ad­justed ba­sis of qual­i­fied prop­erty im­me­di­ately af­ter ac­qui­si­tion. For own­ers of part­ner­ships and S cor­po­ra­tions, busi­ness in­for­ma­tion should be pro­vided in Box 20 of Form K-1.

The Child Tax Credit. To claim the in­creased Child Tax Credit in 2018, tax­pay­ers will need So­cial Se­cu­rity num­bers for ev­ery qual­i­fy­ing child.

Qual­i­fy­ing rel­a­tive credit. There is a new $500 de­duc­tion for a qual­i­fy­ing rel­a­tive. The tax­payer ID num­ber is suf­fi­cient for this credit, which can ap­ply to a child that does not qual­ify for the CTC.

Mov­ing ex­penses. The de­duc­tion and ex­clu­sion are gone for ev­ery­one — ex­cept mem­bers of the armed forces.

The ‘ kid­die tax.’ The kid­die tax is now taxed at the es­tate and trust tax rates, rather than the par­ents’ tax rate.

The AMT. The in­crease in the AMT ex­clu­sion amounts and lower reg­u­lar tax rates will likely mean that fewer mid­dle-in­come tax­pay­ers will be caught by the AMT, but more higher-in­come tax­pay­ers will be caught.

Car­ried in­ter­ests. There is a new three-year hold­ing pe­riod for car­ried in­ter­ests to ob­tain long-term cap­i­tal gain treat­ment. The Af­ford­able Care Act. The in­di­vid­ual man­date is still in place for 2018 — it ex­pires for 2019.

Busi­ness changes

Busi­ness ex­pens­ing. There are higher ex­pens­ing lim­its for cap­i­tal pur­chases un­der Code Sec. 179 and bonus de­pre­ci­a­tion (cur­rently 100 per­cent). Be care­ful, how­ever — higher ex­pens­ing is likely to re­duce the 20 per­cent de­duc­tion for own­ers of pass-through busi­nesses.

Busi­ness in­ter­est. There are new lim­its on de­duct­ing busi­ness in­ter­est based on a 30 per­cent of AGI limit, un­less the busi­ness is un­der $25 mil­lion in av­er­age gross re­ceipts.

Un­der $25 mil­lion in av­er­age gross re­ceipts. Also, if the busi­ness is un­der $25 mil­lion in av­er­age gross re­ceipts, it can use the cash method of ac­count­ing, has no re­quire­ment for in­ven­to­ries, and is exempt from the UNICAP rules. The tax­payer may need to file a Form 3115 for a change of ac­count­ing method.

NOL. There is no car­ry­back of net op­er­at­ing losses to prior years un­less for farm­ing and cer­tain in­sur­ance com­pa­nies.

En­ter­tain­ment and meal ex­penses. There is no de­duc­tion for en­ter­tain­ment ex­penses. The 50 per­cent de­duc­tion for meal ex­penses sur­vives if the tax­payer can iden­tify the meal ex­pense sep­a­rately from the en­ter­tain­ment ex­pense.

Sex­ual harassment set­tle­ments. There is no de­duc­tion for sex­ual harassment or abuse set­tle­ments if the set­tle­ment in­cludes a non-dis­clo­sure agree­ment.

Paid fam­ily and med­i­cal leave. There is a new credit for paid fam­ily and med­i­cal leave.

Trans­porta­tion ex­clu­sions. Many trans­porta­tion fringe ben­e­fit ex­clu­sions have been elim­i­nated.

Sale of part­ner­ship in­ter­ests. If there has been a sale of a part­ner­ship in­ter­est, part­ners and part­ner­ships should check cer­ti­fi­ca­tion re­quire­ments that there is no for­eign in­ter­est in­volved in the sale to avoid a 10 per­cent with­hold­ing re­quire­ment.

Attorney ad­vanced lit­i­ga­tion costs. There is no longer a cur­rent de­duc­tion for lit­i­ga­tion costs ad­vanced by an attorney.

Out-of-state sell­ers.

the Supreme Court’s

Mark A. Luscombe, JD, LL.M, CPA, is prin­ci­pal an­a­lyst for Wolters Kluwer Tax & Ac­count­ing.

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