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Pub. 5307: Fundamentals of Tax Reform for Individuals and Families.

Pub. 5307: Fundamentals of Tax Reform for Individuals and Families.

In December 2017, major tax reform was launched, which concerns individuals and businesses. It is commonly known as the Tax Reduction and Employment Act, TCJA, or Tax Reform. Most of the changes to this legislation came into effect in 2018 and impacted fiscal 2018 and beyond.

This publication comprises some of the provisions of the TCJA. It provides information to you and your family to help you understand, take action if necessary, and meet federal income tax filing requirements.


What's new since fiscal 2019?

Medical coverage, waiver of coverage, and shared responsibility payment

Under the TCJA, the individual amount of the shared responsibility payment is reduced to zero for months starting after December 31, 2018. As of fiscal 2019, Form 1040 will not have the box "Annual exemption or medical coverage," and Form 1

8965, Exemptions from medical coverage will no longer be used. You do not need to make a joint liability payment or send Form 8965, Health Coverage Exemptions with yours.


Revocation of the Deduction for Alimony Payment.

No deduction can be made for support payments you made to or from your ex-spouse if you signed the divorce or separation agreement after December 31, 2018, or if the agreement was signed before December 31, 2018, and amended after December 31, 2018, expressly provide that the TCJA child support provision applies to child support paid and received under the amended contract.

 

Deduction of Medical and Dental Expenses Modified.

If you intend to itemize deductions, the Adjusted Gross Income (AGI) limit for deducting medical and dental expenses is 7.5% for all taxpayers for fiscal years ending after 2018 and starting in 2021 


CHANGES IN TAX RATES.

From 2018 to 2025, most tax rates have been reduced. This means that most people will pay less in taxes than in 2017 and previous years. The tax rates for 2019 are 10%, 12%, 22%, 24%, 32%, 35% and 37%.

In addition to lowering tax rates, some of the law changes that affect you and your family include increasing the child tax credit, increasing the standard deduction, suspending personal exemptions, and limiting or stopping certain deductions.


Federal Income Tax Withholding May Require Adjustments.

The TCJA modified how taxable income is calculated and reduced the tax rates on that income. The IRS was forced to resolve and make changes to withholding Tax in response to the new rule as soon as possible after it was passed. This problem affects all taxpayers who receive a salary.

The tax system in the U.S works with a payment system. Taxpayers are typically required to pay at least 90% of their taxes during the year through withholding, estimated or additional tax payments, or both.

For employees, income tax withholding is the total cost of federal income tax withheld from wages. The amount of income tax withheld by your employer from your regular salary depends on two things: The amount you earn and the employer's information in Form W-4.


Paycheck Checkup.

The new tax law may affect the amount of taxes that a person must deduct from the employer's salary. Taxpayers can use the withholding tax estimator on IRS.gov to prevent employees from having too few or too many payroll tax deductions. Too little withholding tax can mean an unexpected tax bill and even a fine at the time of taxation. You may prefer a lower withholding tax front and receive more of your paycheck, which may mean a lower refund or an unforeseen tax bill. Or you may prefer to make additional or estimated tax payments to avoid unforeseen charges and possibly a penalty.

Everyone should have their annual deduction checked, but this year is even more important, especially for taxpayers who: 

  • Belong to a family with two incomes.

  • Work at least two jobs or only work part of the year.

  • Have children and apply for loans like the child tax credit.

  • Have older dependents, including children over 17.


Updating Form W-4 After Doing a Paycheck.

Taxpayers who use the estimator and determine the need to change withholding tax must complete a new Form W-4, Employee Withholding Certificate. Employees are to send the completed Form W-4 to their employers, and not the IRS. 

Here are some things taxpayers should remember when updating Form W-4:

  • The Withholding Tax Estimate Tool will help you determine if you need to complete a new W-4 form. 

  • The estimator will provide information to users to submit a new Form W-4.

  • Taxpayers who use the estimation tool to verify their withholding tax will save time by not completing the spreadsheets on the W-4 form. The estimator performs the calculations on the spreadsheet.

  • Taxpayers who complete a new W-4 form should send it to their employers as soon as possible. 

Using the Withholding Tax Estimator can help you modify your W-4 to avoid unforeseen taxes or penalties.


Making Estimated or Additional Tax Payments.

Some taxpayers, including those who do not have sufficient withholding tax from employer income, may be required to pay estimated taxes.

If the value of income tax withheld from the salary or pension is not sufficient or if you receive earnings such as dividends, interest, family allowances, self-employment income, earnings in the capital, and bonuses, you may need to make a tax or additional estimate payment.

Taxpayers can adjust the wage deduction or the number of estimated payments to avoid the unpredictable collection of taxes or avoid fines.

Form 1040-ES, an estimated personal income tax, available on IRS.gov, can help taxpayers calculate these payments easily and accurately. The estimated tax package includes a quick summary of major tax changes, income tax tables for the year, and a helpful spreadsheet for calculating the correct amount to pay.


Changes to the Standard Deduction.

The standard deduction is a dollar amount that decreases the amount of income you pay and varies depending on your order's status. The TCJA almost doubled the standard deductions. When you take the standard deduction, you cannot specify deductions for mortgage interest, state taxes, and charitable deductions in Schedule A.

Most taxpayers have the option of making a standard deduction or itemized. Suppose you qualify for the standard, and your standard deduction is more than the total itemized deductions. In that case, you need to claim the standard deduction in most cases, and it is not necessary to submit Schedule A with the income tax return.


Changes to Itemized Deductions.

In addition to almost doubling standard deductions, the TCJA amended several itemized deductions that can be claimed in Schedule A.

This implies that many people who previously itemized may find it more beneficial to take the standard deduction. Changes to the standard deduction and itemized deductions can affect how much your employer has to withhold from payment. Even if you continue to itemize your deductions, you should check your withholding tax.

Several changes were made to the itemized deduction, and it would be best to consult a tax professional or CPA to fully understand what these changes mean for you and your family.


Deduction and Exclusion for Moving Expenses Suspended.

The reduction in moving costs is suspended. During the suspension, no deduction is authorized for an automobile as part of a move. This suspension does not apply to members of the active United States armed forces who move in accordance with a military order concerning a permanent change of post.

Additionally, employers will include relocation expense reimbursement as taxable income in employee salaries, as the new law suspends the exclusion of prior income from an employer's eligible moving expense reimbursements. This suspension does not apply to serving members of the United States Army traveling according to a military order regarding a permanent change of post, provided the expense is justified as a deduction if the government does not reimburse the expense.

This means if you are not an active-duty U.S. military officer, you cannot deduct moving expenses, and any amount reimbursed by an employer will be taxable income.


Alternative Minimum Tax (AMT) Exemption Has Been Increased.

The alternative minimum tax (AMT) exemption amount for the fiscal year 2019 is $ 71,700 and starts decreasing by $ 510,300 ($ 111,700, for couples who jointly present the exemption for which the exemption begins to decrease by $ 1,020,600). The exemption amount for 2018 was $ 70,300 and started to decrease by $ 500,000 ($ 109,400 for couples who applied jointly and started to decrease by $ 1 million).


Repeal of Deduction for Alimony Payment. 

As of fiscal 2019, alimony support payments are no longer included in the receiving spouse's gross income. They are no longer deductible by the paying spouse if the payments are made under a divorce agreement or separation entered into after December 31, 2018, or a divorce or separation agreement entered into until December 31, 2018, but amended after that date to contain an explicit provision that the TCJA rule applies to the agreement.


Treatment of Student Loans Canceled Due to Death or Impaired Physical Disability.

The TCJA amends the exclusion of cancellation of student loans with gross income, including the forgiveness of death or disability in the exclusion. It applies to the cancellation of debts after December 31, 2017, and before January 1, 2026.


Repeal of The Deduction of Sums Paid in Exchange for College Athletic Event Seating Rights. 

Charitable deductions will not be allowed for any amount paid to a higher education institution in exchange for the payer's right to purchase tickets or seats for a sporting event.

This implies that the "seat license" or other fees paid in exchange for the right to purchase tickets at university sporting events are no longer deductible.

Combat Zone Tax Benefits Offered to Military Personnel Who Served in the Sinai Peninsula.

Under the TCJA, members of the United States Army, United States Marine, United States Navy, United States Coast Guard, and the United States Air Force, who served in the Sinai Peninsula, can now benefit from tax advantages in the Sinai Peninsula combat zone tax retroactive June 2015.


Health Coverage Report.

According to the Tax Cuts and Jobs Act, for fiscal years 2019 and up, the shared responsibility payment is reduced to zero. Beginning in fiscal 2019, you no longer need to make a joint liability payment or complete Form 8965 to request a coverage waiver if you do not have minimum essential coverage for some or all of the entire 2019.

The box containing the "Full-year health care coverage or exempt " has been removed from Form 1040.


Recharacterization of a Roth Conversion.

It is no longer possible to re-characterize a conversion from a Traditional SEP or SINGLE IRA to a Roth IRA. The new law also prohibits the reclassification of amounts transferred to a Roth IRA from other retirement plans, such as 403 (b) or 401 (k) plans. You can still treat a regular contribution to a Roth IRA or a traditional IRA as if it were made for another type of IRA.


Plan Loans to an Employee that Leaves Employment.

If you stop working (or the plan is canceled) with a pending loan, a plan sponsor can offset your account balance with the pending loan balance. If a plan loan is paid off, you will have until maturity, including extensions, to transfer the loan balance to a qualifying IRA or retirement plan.


Disaster Relief: Retirement Plans.

In recent years, laws are making it easier for pension plan members to access pension funds to recover from losses caused by disasters in federally declared disaster areas. Such humanitarian aid can enable the taxpayers concerned to:

  • Exemption from the additional tax of 10% on early distributions

  • Extend the loan repayment period

  • Include a qualified hurricane distribution in your income for three years." 

  • Increase loan availability

  • Repay distributions to plan

 

ABLE Accounts: Rollover from 529 Plan.

You can contribute more to your ABLE account. You can also transfer limited amounts from the 529 accounts of a designated qualified tuition program to the ABLE account of your family member's designated beneficiary.


Bottom Line.

Several changes were made across the board, and it would be best to consult a tax professional or CPA so as to fully understand what these changes mean for you, your family, and your business.


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