More tax changes-Employment related business and relocation costs

Some examples of employee business, including moving, and other income producing expenses you can no longer deduct defy logic and may cost you mucho megabucks. Let’s discuss some tax changes that were enacted at warp speed late last year.

Can I deduct investment fees I pay this year? 

No. The Schedule A write-off for these costs, IRA custodial fees paid directly by the account owner, and the rest of the popular miscellaneous deductions subject to the 2%-of-AGI threshold are now gone.

 

My employer paid for my cross-country move. Is the amount taxable to me?

Generally, yes. It used to be that when you relocated for a new job, you could deduct moving costs, or if your employer reimbursed you, the payment was tax-free. Well, not anymore, except for active-duty military personnel who move pursuant to military orders.

    

Is the new opportunity zone program up and running yet?

In part. This program, which is included in the new tax law, lets taxpayers defer capital gains from the sale or exchange of business or personal property, including stocks, by investing the proceeds in opportunity funds to help low-income communities. Those who opt to take advantage of this break have 180 days from the date of the sale to invest all or part of the gain proceeds in a so-called qualified opportunity fund. IRS is set to release proposed regulations on how this tax break will work. An open question is whether gain deferral will automatically end in 2026, when the break is set to expire. Tax and investment advisers hope the guidance will address this concern plus provide clarity on key definitions and other issues.

 

Is Schedule E rental income eligible for the 20% pass-through deduction?

It depends on whether the activity rises to the level of a trade or business. The new tax break applies to qualified business income from a trade or business. In proposed rules, IRS refers to the standard under the federal tax code that generally govern the deductibility of trade or business expenses.  Unfortunately, this standard is unclear in the context of a rental activity. That’s because it’s based on facts and circumstances that are specific to each taxpayer, and the issue hasn’t been resolved by case law. Some aspects considered important: Type of property that is leased, extent of day-to-day involvement by the lessor or the lessor’s agents, number of properties rented and specific terms of the lease. Tax pros and others are pleading with IRS to address this in final regulations. If the agency does not, then it will be up to the courts to resolve it later.

 

Will Congress make permanent the individual tax provisions in the new law?

Not this year. Most off the changes affecting individuals and small businesses expire after 2025. House Republicans will act on a bill to make the changes permanent. But the effort will die in the Senate. This won’s stop GOPers from touting tax cuts, which some see as a campaign message to entice voters in the midterm elections. 

 

2018 Itemized Deductions Changed

IRS released a draft of the 2018 Schedule A. It reflects the changes to itemized deductions that were enacted under last year’s tax reform law. Note that because of the higher standard deductions, far few filers will itemize in 2018 than in the past years. 

Start with medicals. The AGI threshold for deducting 2018 medical expenses stays at 7.5%. It goes back up to 10% for all filers beginning in 2019. 

Turn to state and local taxes. This write-off is now capped at $10,000 for Schedule A itemizers…$5,000 for couples filing separately. Note that property and sales taxes remain fully deductible for taxpayers in a business or for-profit activity. So, property taxes paid on rental realty can be taken on Schedule E without regard to the cap, and self-employeds and farmers can deduct on Schedule C or F property taxes and sales taxes paid in their business. 

Interest on home mortgages in nicked. Interest can be deducted on Schedule A on up to $750,000 of acquisition debt on a primary and a secondary residence…down from $1 million. This new limit generally applies to home mortgage debt incurred after December 14, 2017. Older loans and refinancing’s up to the old loan amount get the $1 million cap. No write-off is allowed after 2017 for interest that you pay on existing or new home equity loans from which the proceeds are used to buy a car, pay down credit card debt, etc. The law’s crackdown on home equity loans doesn’t apply to debt secured by a first or second home and used to remodel or improve the place.    

Interest on margin loans can still be written off. Investment interest paid is deductible on Schedule A up to the amount of net investment income reported. 

The charitable contribution write-off is preserved, with a couple of changes. The AGI limitation on cash donations to qualified charities is hiked from 50% to 60%. Also, gifts to colleges in exchange for the right to buy choice seats at sporting events aren’t as valuable taxwise. Under old law, donors were able to deduct 80% of the gift, even when the value of the seat license they received in exchange for their donation exceeded 20% of the donation. Congress eliminated this break in the new tax law. 

The deduction for personal casualty and theft losses is a thing of the past…Except for casualty losses incurred in presidentially declared disaster areas.  

All deductions that were subject to the 2%-of-AGI threshold are gone. These include unreimbursed employee business expenses, tax preparation costs, investment account management fees, IRA custodial fees paid by the account owner, hobby expenses to the extent of hobby income, safe deposit box fees and many more. 

But other miscellaneous write-offs survive, such as personal gambling losses to the extent of gambling winnings that are reported on the first page of the 1040. Note that years ago you could offset gambling losses directly fro gambling winnings on Line 28 of Form 1040, regardless of whether or not you itemized deductions. I think it is totally unfair and discriminatory to restrict this deduction only to people who itemized their deduction. Now, more than ever, with more people claiming the standard deduction, it will forced those who occasionally win from lottery tickets, casinos, racetracks, etc. to pay tax on the winnings regardless if their losses was greater than their winnings. I had a situation years ago where an elderly client who rarely gambled and did not have itemized deductions that were sufficient to claim more than the allowable standard deduction, ended up paying income tax on her winning lottery ticket without the benefit of reducing it by her losing tickets.

 The phaseout of itemized deductions for upper-incomers is scrapped.