For divorce or separation agreements entered into after December 31, 2018, the deduction for alimony or separate maintenance payments is repealed. When the divorce needs to be executed by for the alimony deduction depends on state law, individuals should consult their attorneys.
For United States citizens working abroad, beginning in 2006, there were three changes made to the foreign earned income exclusion and housing allowance.
State and Local Deduction
Tax reform introduced a $10,000 cap on the itemized deduction for state and local, sales, income or property taxes for tax years beginning in 2018 and before 2026. While the limitation impacts all individual taxpayers, it will especially impact taxpayers who will file returns in states with high income and property taxes, including New York, New Jersey, Connecticut, California, Maryland, and Oregon, and on married couples (regardless of whether they file jointly or separately).
The cap limits taxpayers’ SALT deductions to $10,000 per return, and married taxpayers who file separately can only deduct up to $5,000 each, for itemized deductions. The cap does not apply to deductions resulting from a trade or business.
A significant change for individuals resulting from tax reform was the near doubling of the standard deduction amounts. However, individual tax reform is temporary and is scheduled to sunset in 2026. Your advisor can assist you in adapting to the temporary changes based on your individual circumstances.
The deduction for personal exemptions is suspended through 2025; however, the $100 and $300 exemptions for complex and simple trusts, respectively, were retained.
The $4,150 exemption for qualified disability trusts was also retained but is to be adjusted for inflation in future years.
Passive Activities, Rental and Vacation Homes
Losses from passive activities (which, as discussed below, generally include the rental of real estate) are deductible only against passive income. Passive losses cannot be used to reduce non-passive income, such as compensation, dividends, or interest. Similarly, credits from passive activities can be used only to offset the regular tax liability allocable to passive activities.
Excess Business Loss Limitation
Introduced in the 2017 tax reform under Section 461(l), a taxpayer will only be able to deduct net business losses of up to $250,000 ($500,000 in the case of a joint return) for taxable years beginning after December 31, 2017, and before January 1, 2026. Excess business losses are disallowed and added to the taxpayer’s NOL carryforward. Previously, suspended passive activity losses were allowed in full upon the taxable disposition of the passive activity.
Additionally, non-corporate NOL rules now limit deductible NOL carryforwards to the lesser of the carryforward amount or 80-percent of taxable income. Taxpayers are no longer permitted to carry back their NOLs to the previous two taxable years, but they may carryforward their NOLs indefinitely.
Tax reform lowered the corporate tax rate to a flat rate of 21 percent. In turn, under the new law (under Section 199A), for taxable years beginning after December 31, 2017, taxpayers other than C corporations with taxable income (before computing the Qualified Business Income (QBI)) at or below the threshold amount, are entitled to a deduction equal to the lesser of:
Alternative Minimum Tax
A taxpayer must pay either the regular income tax or the AMT, whichever is higher. The AMT tax system is parallel to the regular tax, but it treats some items of income and deduction differently.
Incentive Stock Options
An incentive stock option (ISO) is an option issued to an employee that allows all increases in value to be subject to long-term capital gain treatment if the taxpayer disposes of the option shares more than two years after the date the option is granted and more than one year after the date the option shares are purchased.
Children’s Taxes (Kiddie Tax)
Beginning in 2018, unearned income of a child under age 18 is taxed at ordinary income and preferential rates applied to trusts and estates. Earned (compensation) income received by a child under age 18 is taxed at the rates applied to single filers.
Up to $13,810 for 2018 of eligible adoption expenses are allowed to be claimed as a nonrefundable credit. The credit limitation is the same for special-needs children (children that cannot or should not be returned to the home of the birth parents because of specific factors, or who could not otherwise be adopted because of certain conditions). The credit is per adoption, not per year.
Thus, if a person adopts two children in 2018 and incurs $30,000 of qualified expenses, the credit limitation is $27,620. In 2018, the adoption credit is phased out for higher income individuals with modified AGI between $207,140 and $247,140. Unused adoption credit can be carried forward for up to five years.
Nanny Tax Reporting
During 2018, if you paid $2,100 or more to a person 18 or over for household services, you are required to report his or her social security and federal unemployment taxes on your personal tax return. These amounts are reported on Schedule H.
Estate and Gift Taxes
Tax reform increased the applicable estate and gift exemption for individual taxpayers and doubled the generation-skipping transfer tax exemption amounts to $11,180,000 ($22,360,000 for married couples), for tax years beginning after December 31, 2017, and before January 1, 2026.
Generally, all individuals must make quarterly estimated tax payments if they have income that is not subject to withholding. This includes individuals who are self-employed or retired or who have investment income, such as interest, dividends, and capital gains. It also includes partners and S corporation shareholders.
Year-end and Other Gifts; Portability
The end of the year is the traditional time for making gifts. For 2018 you may give up to $15,000 to a person without incurring any federal gift tax liability. The $15,000 annual limit applies to each donee. Thus, you may make $15,000 gifts to as many people as you like.
Opportunity Zone Program
The opportunity zone program was created under tax reform to promote investment in economically distressed communities. There are now over 8,700 certified QOZs in all 50 states, the District of Columbia, Puerto Rico and the Virgin Islands. Investors must invest in a qualified opportunity fund (QOF) within 180 days after the sale or exchange of a capital asset.
Like an annual physical examination is important for maintaining good health, an annual financial examination that includes year-end tax planning can enhance your financial well-being. Your advisor is available to help you achieve your tax and financial objectives.