Things to Know for the Current Tax Year

Things to Know for the Current Tax Year

Below are the details on the Extender and Disaster Relief provisions passed on December 20, 2019 as well as additional federal provisions that go into effect in 2019, additional changes to Form 1040 and associated Schedules, and reminders of Tax Cuts and Jobs Act provisions that are still in effect for tax year 2019.

Extender and Disaster Tax Relief Provisions Included in the 2020 Consolidated Appropriations Legislation

The 2020 Consolidated Appropriations Act that was signed into law on December 20 included restoring the expired extender tax provisions (that had expired at the end of 2017) for 2018 – 2020 and disaster relief provisions that cover all federally declared disasters that occurred in 2018 or 2019.

Most Relevant Extender Provisions
The following expired federal provisions that affect individuals were extended for 2018, 2019 and 2020:

  • Tuition and Fees Deduction (Form 8917/Form 1040, Schedule 1, line 21)
  • Medical expense deduction 7.5% AGI floor was restored for 2019 and 2020.
  • Exclusion of gain from income of foreclosed home mortgage debt (Form 982, line 1e)
  • Ability to treat mortgage insurance premiums as qualified mortgage interest (Schedule A, line 8d)
  • Nonbusiness Energy Property Credit – Form 5695, Part II
  • Credit for 2-Wheeled plug-in electric vehicles – Form 8936
  • Credit for new qualified fuel cell motor vehicles – Form 8910

There were also 21 business related provisions that were extended as well that are detailed in the Amendment to the 2020 Appropriations legislation.

Disaster Relief Provisions
The following disaster relief provisions were made available to taxpayers that were affected by a federally declared disaster that occurred in 2018 or 2019:

Deduction for Personal Casualty Losses
Uncompensated losses that occurred in a federally declared disaster area:

  • Must exceed $500 in order to take a deduction
  • Removes the requirement that the loss exceed 10% of AGI
  • May be taken as an itemized deduction or as an increase in a taxpayer’s standard deduction.

Special Rule for Determining 2019 or 2018 Earned Income for the Earned Income Tax Credit and Child Tax Credit
Qualified individuals may use their earned income from the preceding tax year to determine their earned income tax credit and their child tax credit if they lived in a federally declared disaster area in 2018 or 2019 as follows:

  • 2018: May use their 2017 earned income if their 2018 earned income is less than their 2017 earned income.
  • For 2019: May use their 2018 earned income if their 2019 earned income is less than their 2018 earned income.

Qualified individuals are those whose principal place of abode was located in a federally declared disaster zone or they lived in applicable federally declared disaster area and they were displaced from their home because of the disaster.

Retirement Fund Provisions

  • For qualified federal disaster distributions, an individual can withdrawal funds (up to $100,000) from a retirement account free of the 10 percent early withdrawal penalty and can spread the taxable portion on that distribution over a three year period.
  • Any qualified federal disaster relief withdrawal will not be taxable if it is recontributed within three years of the date of distribution.
  • Increases the maximum loan amount for qualified federal disaster relief to $100,000.
  • Allows for re-contribution of retirement plan withdrawals for cancelled home purchases or construction of a principal residence due to a federally declared disaster.

Charitable Contributions for Disaster Relief
Suspends the limitation on charitable contributions associated with a federally declared disaster that are made in 2018 or 2019.

For a complete list of all of the provisions included in the 2020 Appropriations legislation see the Amendment to the 2020 Appropriations legislation.

Federal Provisions Effective beginning in 2019

ACA Individual Penalty
The individual shared responsibility payment (penalty) for not having health insurance was eliminated beginning with tax year 2019.

The elimination of the penalty created the following changes as well:

  • Removal of the health insurance checkbox from Form 1040
  • Removal of penalty line from revised Form 1040, Schedule 2
  • Elimination of Form 8965 (Health Coverage Exemptions)

For divorces that are finalized after December 31, 2018, alimony and separate maintenance payments are no longer deductible as an adjustment to income by the payor spouse and these payments are no longer included in the income of the receiving spouse.

For divorces that were finalized before January 1, 2018, alimony and separate maintenance payments continue to be deductible as an adjustment to income by the payor spouse and these payments are includible in the income of the receiving spouse.

Because of this change the taxpayers who are taking an adjustment in income for alimony must now include the date of the original divorce or separation agreement.

Additional Form 1040 and Associated Schedule Changes
Form 1040 and the associated schedules have had additional changes made to them. All lines were renumbered and the original six associated schedules were reduced to three which means that Schedules 4 – 6 were eliminated. Other changes were as follows:

Form 1040

  • Moved Total from Schedule D (Capital Gain/Loss) from Schedule 1 to Form 1040 itself
  • Split IRAs, pensions and annuities into two lines – one for IRA distributions and one for pensions and annuities
  • Removed checkbox for health insurance coverage
  • Moved signature area to bottom of page 2
  • Returned foreign address and third party designee to Form 1040 address area (was on Schedule 6)
  • Added line for total additional income from Schedule 1
  • Added line for total adjustments to income from Schedule 1
  • Form 1040 will now print as two pages since the changes that were made takes up more than one half of each page

Schedule 1 (Additional Income/Adjustments to Income)

  • Moved Total from Schedule D to Form 1040
  • Removed line for total from Schedule D and moved it to Form 1040, page 1
  • Added line for entering the original divorce or separation agreement date for alimony paid

Schedule 2 (Additional Taxes)

  • Includes all other taxes in two parts
    •  Part I – Alternative minimum tax and Excess Advance Premium Tax Credit repayment
    • Part II – Other taxes such as SE Tax and Additional Tax on IRAs

Schedule 3 (Additional Credits and Payments)

  • Consolidated credits and other payments as follows:
    • Part I - Nonrefundable credits
    • Part II - Other payments and refundable credits

New Form 1040SR (US Income Tax Return for Seniors)
This form was mandated by the Tax Cuts and Jobs Act.  Here are highlights of this form:

  • For taxpayers 65 or older
  • Has larger font sizes and removed shading around some boxes to improve the readability for taxpayers with declining vision
  • Includes a Standard Deduction table at the bottom of page 1
  • This new form will share the instructions for Form 1040

The addition of this form and the changes to make it easier to read was put in place for those taxpayers who still complete their returns by hand. For those who use tax software to complete their return it will only affect the version of the Form 1040 that will be printed from the program.

Reminders of Tax Cuts and Jobs Act Provisions Still in Effect for 2019
Below is a recap of the provisions of the Tax Cuts and Jobs Act that are still in effect for 2019. They are presented in the following sections:

  • Individual Provisions
  • Qualified Business Income Deduction
  • Depreciation Provisions

Individual Provisions

Personal and dependent exemptions are no longer applicable
Exemption deduction for the taxpayer, spouse and dependents continues to be not applicable.

Standard Deduction
The standard deduction was substantially increased beginning in 2018 and will increase each year based on inflation.

For 2019 the Standard Deduction amounts are:

  • $12,200 - Single and Married Filing Separately
  • $24,400 – Married Filing Joint or Qualifying Widow(er)
  • $18,350 – Head of Household

Child Tax Credit
The child tax credit remains $2,000 for each qualifying child with $1,400 eligible to be refundable.

The age limit for a qualifying child remains at under the age of 17.

Remember that an eligible child must have a Social Security Number to qualify for the child tax credit.

Other Dependent Credit
There is a $500 nonrefundable credit for children age 17, 18 or are full time students age 19-24 and other qualifying dependents.

Itemized Deduction Changes

  • Real Estate, State and Local Income Taxes are limited to $10,000
  • Form 2106 Business Expenses are no longer allowed as an itemized deduction
  • Casualty losses are limited to losses associated with a federally declared disaster area

Moving Expenses
Only taxpayers that may take an adjustment to income deduction are members of the military.

Entertainment Expenses
A deduction is no longer allowed for activities generally considered to be entertainment, amusement or recreation by corporations, partnerships or sole proprietors.

Qualified Business Income Deduction

How Deduction is Calculated
The Tax Cuts and Jobs Act included a provision that may allow an individual to deduct 20% of their domestic qualified business income from a partnership, S Corporation or sole proprietorship (Schedule C or F). This provision is in effect for tax years 2018 – 2025.

For the vast majority of taxpayers (90%) this deduction is calculated as the lesser of:

  • 20% of their net business income or
  • 20% of their taxable income excluding capital gains

Therefore, for most taxpayers they will use new Form 8995 (Qualified Business Income Deduction Simplified Computation) to calculate this deduction.

For the remaining 10% of taxpayers whose income exceeds $157,500 ($315,000 for joint filers) the deduction will be limited as follows:

  • For “specified service businesses” the deduction begins to be phased out once the income limit is reached.
    • Specified Service business is defined on page 34 of the 2018 Form 1040 instructions.
  • For all other businesses the deduction is limited to:
    • 50% of the W-2 wages paid by the business or
    • 25% of the W-2 wages paid by the business plus 2.5% of the unadjusted basis of all qualified property

For these taxpayers the deduction will be calculated using new Form 8995-A (Qualified Business Income Deduction).

When Rental Activity Can Be Included as Qualified Business Income
The IRS has created a safe harbor that allows rental real estate activity to be treated as a trade or business for purposes of the qualified business income deduction (QBI).

If all of the following requirements are met the rental activity will be considered trade or business income for QBI purposes:

  • Separate books and records are maintained
  • The following number of hours devoted to the rental activity must have been performed:
    • In existence less than 4 years – 250 hours each year
    • 4 years or more: 250 hours at least 3 of the past 5 years
  • Must maintain contemporaneous records

If the rental activity qualifies, the taxpayer must attach a statement to their return that includes the following:

  • A description of all rental real estate properties (including the address and rental category) that qualify for the safe harbor
  • A description of real estate properties acquired or disposed of during the taxable year
  • A statement that the requirements for the safe harbor have been satisfied.

For more information see the following:

Depreciation Provisions

Limits for Autos and Personal Use Property
The yearly limitations for passenger autos placed in service during 2019 are:

  • $10,000 for year placed in service
    • If bonus depreciation is elected the limit is $18,000.
  • $16,000 for year 2
  • $9,600 for year 3
  • $5,760 for year 4 and later

100% Bonus Depreciation
100% bonus depreciation may be taken for qualifying new or use property purchased during 2019.

The definition of eligible property was expanded to include used property if all the following factors apply if:

  • Taxpayer never used the property before acquiring it.
  • Property was not acquired from related party or a component member of a controlled group of corporations.
  • Taxpayer’s basis is not figured in whole or in part by reference to the adjusted basis property in the hands of the seller or transferor.
  • Basis of property is not figured under the provision for deciding the basis of property acquired from a decedent.

Section 179 Expense
For 2019 the maximum amount that can be taken as a Section 179 expense is $1,000,000 which begins to phase out when total asset purchases reaches $2,500,000 for the year.

The following property now is eligible for Section 179 expensing:

  • Qualified improvement property made to a building’s interior with the exception if it is for the enlargement of the building, any elevator or escalator or the internal framework of the building
  • Roofs, HVAC, fire protection systems, alarm systems and security systems

Depreciation of Improvements on business property
Remember that any qualified improvement made on business property during 2019 does not qualify for 100% bonus depreciation and must be depreciated over 39 years.

Due to a drafting error in the Tax Cuts and Jobs Act qualified improvement property was not given a 15-year recovery period. This resulted in it defaulting to a 39 year life. Congress would need to pass a technical correction in order to fix this.

As background – a new qualified improvement property category was created by the Tax Cuts and Jobs Act which replaced the old qualified leasehold improvement, qualified restaurant and qualified retail improvement property categories. This new category went into effect on January 1, 2018.