Prepare to pay more taxes in 2019

By Bob Plunkett

The income tax landscape has changed in the US thanks to the Tax Cuts and Jobs Act which was passed last year (2017). And the new law is going to impact nearly every income tax payer when they file their 1040 in the spring of 2019. The basic change is that quite a number of deductions are about to disappear, leading to higher tax bills since no new deductions were included. Worse, these changes will be in place until 2025 which is when they are set to expire – unless new provisions are written in the meantime.

Perhaps the most significant change is that personal exemptions can no longer be claimed for your family – yourself, your spouse, your dependents. This could really hurt because each personal exemption was good for an average $4,000 tax deduction. So a family of four which could have realized total deduction of $16,000 will now realize nothing. However, the child tax credit has been increased by $1,000 and it is being made available to more taxpayers. And there is a new $500 credit for all other dependents.

Another lost deduction is making a lot of additional news. Some angry but frugal couples are rushing to finalize their divorce before the end of the year. The reason is simple; the new tax overhaul will eliminate the deduction for alimony. The alimony deduction from divorce or separation decrees will end after December 31, 2018 for the spouse making those payments. At the same time, the recipient of what’s called spousal maintenance will no longer have to declare those payments as taxable income. The changes will shrink the amount of money available for the split-up households because taxes will rise significantly for the spouse making the alimony payments. The spouse receiving the payments is usually in a lower tax bracket which reduces the tax savings. It is important to note that this new rule does not affect 2018 returns or anyone who is currently paying or receiving alimony. Taxpayers who are divorced before December 31, 2018 will continue to deduct or report alimony payments – a continuation of business as usual. NOTE: the tax rules on child support do not change. Child support payments are not tax deductible by the payer or included as taxable income by the parent receiving that support. 

Before 2018, you were allowed to deduct your moving expenses if your relocation relates to starting a new job or a transfer to a new location for your present employer. But not anymore. Now the moving expense deduction is only available to active-duty members of the armed forces who move due to a military order. Now, workers who get non-military moving expenses will include it in taxable wages, tips and other compensation reported on a W-2.

Many people started to panic when the new tax law appeared to end the deduction for interest on home equity loans. But that isn’t necessarily true. You can claim an itemized deduction on a debt secured by your home -but only if it is used to buy, build or substantially improve it. If you take a loan to pay for things like an addition, a new roof or a kitchen renovation, you can still deduct the interest. If you use the money to pay off credit card debt or student loans — or take a vacation — the interest is no longer deductible. You can use all or part of the loan for personal expenses. You just can’t take the interest deduction on the amount used for those purposes.

The deduction for property casualty loss used to cover a pretty wide-ranging set of circumstances, but that changed with the passage of the tax cut law in 2017. From tax year 2018 and through tax year 2025, you can only deduct casualty and theft losses if they’re brought about due to an event that’s been declared a disaster by the U.S. president. You can still claim these losses on your 2017 tax return, however, if you amend it – even without a presidential declaration.  

Employee business expenses that haven’t been reimbursed are no longer deductible on Schedule A. You can no longer deduct business meals, travel and entertainment from your taxes. This also includes using your car for business, job-related education, job-seeking costs, a qualified home office, union and professional dues and assessments, work clothes and work supplies.

Investment expenses are also no longer deductible as a miscellaneous expense on Schedule A. These include custodial and maintenance fees for investment and retirement accounts, fees for collecting dividends and interest, fees paid to investment advisers, the cost of investment media and services, and safe deposit box rental fees. 

Unless you are self-employed, tax preparation fees are no longer deductible in tax years 2018 through 2025. Self-employed taxpayers can still write off their tax prep fees as a business expense. Prior to 2018, taxpayers who weren’t self-employed were allowed to claim tax prep fees as a 2% miscellaneous deduction. However, few taxpayers were able to take advantage of this deduction.

A legal award, judgment or settlement for personal physical injuries or physical sickness is tax exempt. But related legal fees are not deductible since that income is not taxable.

Legal fees related to an award, judgement or settlement from a claim of unlawful discrimination are deducted as an adjustment to income on the 1040 form, reducing adjusted gross income.

Legal fees related to all other taxable awards, judgements or settlements, which were previously allowable as miscellaneous expenses on Schedule A, are no longer deductible on the 1040. For example, if you are awarded a settlement of $100,000 and your attorney receives $30,000 of it, you must pay federal income tax on the entire $100,000 even though you’re only receiving $70,000.