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December 13, 2018
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New Tax Law Update
Posted On: Jan 31, 2018

IMPORTANT TAX INFORMATION FROM OUR ATTORNEY JIM MICHELS


TAX CHANGES AFFECT DEDUCTIBILITY OF MISCELLANEOUS EXPENSES

The new tax law does not take effect until tax years beginning after 12/31/17. This means that current law will still apply to tax returns for 2017 which must be prepared and filed prior to April 15, 2018.

Current Law
For the 2017 tax year, employees who itemize their deductions are entitled to deduct a variety of job-related expenses. These are considered “miscellaneous deductions” under Section 67 of the Internal Revenue Code. Miscellaneous deductions include such things as:
Union dues
Tax preparer expenses
Safe deposit boxes
Required uniforms, equipment and tools

New Law
Under Section 11045 of the new law, Internal Revenue Code Section 67 is amended to provide that NO miscellaneous deductions will be allowed for tax years 2018 through 2025. This means that these items (union dues, tax preparer fees, safe deposit boxes, uniforms, equipment and tools) will NOT be deductible for tax years 2018 through 2025.

That is the simple explanation. However, remember many other things are changing and the loss of the ability to deduct union dues will not necessarily adversely affect everyone.


Other Considerations

Standard Deduction Increasing. The Standard Deduction (which is the alternative to itemizing deductions) will be increasing for tax years 2018 through 2025 as follows:
Current New 
Single $6,300 $12,000
Head of Household $9,300 $18,000
Married – Joint Filer $12,600 $24,000

This means that many taxpayers will no longer find it advantageous to itemize deductions unless their deductions are more than the new standard deduction levels. For a person who currently itemizes, but switches to the Standard Deduction, the change in deductibility of union dues, etc. will not make a difference. (Remember also, that the deduction for state income taxes and property taxes will be capped at $10,000 so to get to the level at which itemizing make sense, single taxpayers will have to have $2,000 of additional deductions above state and local taxes and married taxpayers filing jointly will have to have $14,000 of additional deductions above their state and local taxes.)

Personal Exemptions Eliminated. But, the new tax bill giveth and also taketh away. Although the standard deduction amounts are going up, the personal exemptions are eliminated (both changes are temporary for tax years 2018 through 2025). This will impact taxpayers with multiple dependents. A quick example will illustrate the point:

“Taxable income” is determined by taking all income from all sources, substracting exclusions, deductions and exemptions. Using the example of a married taxpayer with 2 dependent children and $120,000 of combined family income that uses the standard deduction.

Under current law, taxable income (assuming no exclusions) would be $120,000 minus the standard deduction of $12,600 minus 4 exemptions equaling $16,200 ($4,050 x 4) = $91,200.

Under the new law, taxable income is $120,000 minus the standard deduction of $24,000 = $96,000.

The rates are changing. 
Using the example above, the tax under current law on $91,200 of taxable income is: $14,336. The tax under the new law on $96,000 of taxable income is: $12,999. So, even though taxable income is higher, the tax due is lower.

Let’s look at our married taxpayer with $120,000 in combined income with 4 exemptions and assume that for 2017 he/she itemizes and has $16,000 in itemized deductions (including $1,000 union dues, $300 paying a tax preparer, $700 uniforms and equipment, $11,500 state income and local property taxes and $2,500 in charitable contributions). The taxable income for this family is $87,800 ($120,000 minus $16,000 of itemized deductions minus $16,200 of exemptions). Currently, the tax on this amount is $13,499. Under the new law, the family would take the standard deduction of $24,000 because it is more than the allowable itemized deductions ($10,000 in state and local taxes plus $2,500 for charitable contributions). Thus, the taxable income is $96,000 ($120,000 minus the standard deduction). The tax on $96,000 under the new law is $12,999. Thus, the tax is still $500 lower even though taxable income is $8,200 higher and the employee can no longer deduct union dues and uniforms.

Finally, let’s add in to the mix of current deductions $10,000 in mortgage interest. Under current law, taxable income is $77,800 ($120,000 minus itemized deductions of $26,000 minus $16,200 in exemptions). The tax on that amount is $10,999. Under the new law, allowable itemized deductions are $22,500 ($10,000 for state and local taxes, $2,500 for charitable donations and $10,000 for mortgage interest). The standard deduction of $24,000 is still greater than the allowed itemized deductions. So the taxable income remains $96,000 under the new law and the tax is $12,999. This taxpayer would see his/her taxes GO UP by $2,000. This result is from the combined effect of eliminating the deductions on union dues and uniforms, capping the deduction on state and local taxes and eliminating personal exemptions.


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