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Tax Reform - New Year, New Tax Rules

Now that The Tax Cut & Jobs Bill is the law of the land, several long-lived tax benefits are now gone. As a result, taxpayers may need to plan accordingly and change some habits. Here's our head's up.

The Tax Gotchas for 2018

The items that Individual taxpayers should be on the watch for:

  1. The $4,050 deduction for personal exemptions is now gone. Families with several children who are too old to qualify for the Child Care Tax Credit may see a dramatic increase in their taxable income.
  2. Added planning will be required for taxpayers wanting to convert all or a portion of their Traditional IRA to a ROTH IRA. In the past, taxpayers could use hindsight and undo those conversions within specific time constraints. Starting this year, those conversions once done cannot be undone.
  3. Unless a taxpayer is a member of the Armed Forces, moving expenses are no longer deductible. Likewise, if an employer reimburses those expenses, the employee must report the reimbursement as taxable income.
  4. Employees who incur business expenses that are not reimbursed by their employer could be in for a shock. In the past, those deductions were subject to disallowance up to 2% of adjusted gross income. Starting this year, those expenses will no longer be deductible at all. One way to get around this is to negotiate a reduced salary in exchange for an expense allowance from the employer. Both employer and employee will save taxes in this arrangement.
  5. Personal losses from theft and casualties (fire, storm, etc.) are no longer deductible unless incurred in a Federally-declared disaster area.
  6. The deductibility of state income taxes, property taxes, sales taxes and other local taxes will be capped at $10,000 annually.
  7. For divorces completed after 2018, alimony payments will not be deductible to the payor, and will not be included in the income of the payee.
The items for Business taxpayers to know are:
  1. Starting in 2018, income from the sale of a patent, invention, model or formula no longer qualifies for long-term capital gain tax rates. Income from these transactions will now be ordinary income.
  2. Trade-ins of vehicles and other equipment become fully taxable in 2018. Gains from trade-ins can no longer be deferred into the cost of the replacement property.
  3. Expenses incurred for meals and entertainment activities become fully nondeductible.
  4. Net operating losses (NOLs) can no longer be carried back two years to recover taxes paid in those years. Instead, the NOL can only be carried forward and offset no more than 80% of taxable income on future tax returns.