by Abbey Garber
After years of making only minor changes to the Internal Revenue Code, Congress passed sweeping reforms that will affect almost every American. The effects of those changes cannot be known for some time, but it is crucial for each of us to evaluate our personal tax situation. This article covers some of the changes affecting individuals and small businesses, which will be important not just to clients, but to attorneys as well.
First some good news: (1) A taxpayer may expense, instead of capitalize, the cost of section 179 property up to one million dollars. Section 179 property includes business equipment (i.e., computers or machinery) and also improvements to nonresidential real property, such as roofs, HVAC, and alarm systems. This means you can take the full expense as a deduction from your taxable income this year. While cars are included, the cost of any sport utility vehicle taken into account is limited to $25,000. (2) The child tax credit is now worth up to $2,000 per qualifying child (and there is also a child and dependent care credit to recoup some costs of child care).
Now for a little bad news: (3) Section 274 disallows any deduction for entertainment, amusement, or recreation. That means Uncle Sam is no longer sharing the cost of your tickets to see the Cowboys, Mavericks, Rangers, and Stars. Even if they lose. (4) Section 274 was also amended to prohibit any deduction by an employer for “qualified parking,” which is defined as parking at or near the business premises of the employer.
In addition to the good news and the bad news, there is also some questionable news: (5) The new section 199A provides for up to a 20 percent deduction of qualified business income for sole proprietorships and pass-through businesses (such as partnerships and S corporations), but specifically excludes income earned from providing legal services, unless the taxpayer claiming the deduction has taxable income below the specified threshold ($315,000 if married filing jointly and $157,000 for all other taxpayers). (6) Individual rates went down for many people and (7) the standard deduction was raised significantly to $12,000 for a single filer and $24,000 for a couple filing jointly, but (8) there are no longer any personal exemptions and (9) the annual deduction for state and local taxes (i.e., property tax and sales tax in Texas) is limited to $10,000. Additionally, there are no longer miscellaneous itemized deductions (such as unreimbursed employee business expenses, tax preparation fees, and investment-related expenses).
What does all of this mean for you? You will have to run the numbers. It is more likely that many of us will no longer itemize deductions.
What about next year? No one knows, except one change (10) has already been made for payments required under divorce or separation instruments executed after December 31, 2018. Those payments will no longer be deductible by the payor or includible as taxable income by the recipient. A few years back, year-end changes to estate and gift taxes caused a flurry of substantial gifts (and ghoulish speculation about the right time to die). Will this change cause a flurry of divorces at the end of this year? That is not as likely, because deductibility of payments by one former spouse means inclusion of income by the other former spouse.
What should you do today? Check your withholding and estimated tax payments for this year. There is a withholding calculator on www.irs.gov/individuals/irs-withholding-calculator to check how much you should be setting aside so, when you file your return in a few months, you don’t have a large tax bill and even a penalty for having underwithheld. Section 6654 of the Internal Revenue Code provides that you can avoid that penalty in most cases if you withhold 100 percent of the tax on the previous year’s return (110 percent if adjusted gross income exceeds $150,000).
Abbey Garber is a partner at Thompson & Knight. He can be reached at email@example.com.