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Question: Where in the software can I see the impact of the provisions of the 2017 tax act?
The sections below will discuss the various provisions of the 2017 tax act that are incorporated in Family Law Software.
After the first two items, the items are listed in the sequence you will find them on the View/Edit Taxes screen (which is the same as the sequence you would find them going down the 1040 form).
1. Term of Act.
Under the terms of the act, many of these provisions expire after the year 2025.
With respect to those provisions, in all cash flow projections after that year, the tax law in effect through 2017 will be restored.
It is possible for you to specify that you wish to see projections as if the provisions are extended to any particular future year or indefinitely.
To do that,click Files > Settings > Assumptions, and override the entry on the line labeled "Last year for personal tax provisions of 2017 act." (At this writing, this is line 3 on that page.) To indicate that the act is extended indefinitely, simply make last year be 50 years from now. (The software can project up to 50 years.)
2. Tax Brackets and Rate Table.
The act provides new rates and brackets during its term (through the year 2025). the brackets are to be adjusted for inflation (although a slightly smaller measure of inflation than previously applied).
The impact of the smaller measure of inflation will be to adjust the brackets less, which will slightly increase the amount of tax due, compared with the prior measure of inflation.
The new rates are 10%, 12%, 22%, 24%, 32%, 35%,and 37%.
These replace rates of 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%.
For each filing status, there are also new tax brackets. To see the tax brackets, you may search in your browser for "2017 jobs and deductions tax act brackets" and choose an entry published on or after December 18, 2017.
The act also changed the top amount of capital gains income that can be taxed at the zero bracket and the 15% bracket. These changes are built into the current tax calculations as well.
Where to find it:
The new tax brackets and rate table are reflected in the View/Edit Taxes report, on the line labeled "Tax Before Credits and Other Taxes."
In projections starting in the year 2026, the prior brackets and tables, adjusted for projected inflation, will resume.
To see what the tax would be on any particular level of income, you can specify the filing status, and then override the line for Taxable Income (after pass-thru deductions) on the View/Edit Taxes report.
Don't forget to clear the override when you are done.
You can also see details of the tax calculation, including the capital gain rate calculations, by clicking the link that is next to the line for taxable income on the View/Edit Taxes report.
3. Alimony income and deduction
Prior to the tax act, alimony payments were deductible to the payer and included in the income of the recipient.
The parties had the option to designate the payments as not deductible and not includable.
Effective for agreements entered into on or after January 1, 2019, alimony payments are NOT deductible to the payer and NOT included in the income of the recipient.
Also, for agreements entered into before then, amended on or after January 1, 2019, the parties may agree to make the alimony have no tax effect. (This was always the case in any event.)
Unlike most provisions relating to individuals under the act, this provision does not expire in 2026. The act makes it permanent.
Where to find it.
Since this provision does not take effect for a year, there is no immediate change in the software.
If you would like to see the impact of this provision, you may check a box to specify that the alimony is not deductible to the payer or taxable to the recipient.
This checkbox is located on the screen where you enter alimony modifications.
You can get there by going to the screen where alimony is entered, and clicking the link relating to alimony modifications.
You can find the screen where alimony is entered by clicking a link at the bottom of the Client Info > Income & Expenses > Living Expenses screen or the Client Info > Income & Expenses > Wage-Like Income screen.
In many states, you can also find this screen near the bottom of the Client Info screen where you enter child support data, in the section entitled, "Support to Use...."
4. Deduction for Medical Expenses.
For the years 2017 and 2018, only, the threshold beyond which medical expenses are deductible has been decreased from 10% of adjusted gross income to 7.5% of adjusted gross income.
This has the effect of increasing the amount available to be deducted.
You will see this on the View/Edit Taxes report, on the line for medical expense deductions.
Please note that these deductions have always referred only to out-of-pocket deductions. Amounts that employers pay for an individual's health insurance are not deductible.
5. State and local income and property taxes.
State and local income and property taxes are now deductible only to the extent that, in total, they are not more than $10,000.
Where to find it:
On the View/Edit taxes report, you will see six additional numbers. They are:
During the years that the 2017 tax act applies, the latter three lines will add up to no more than $10,000.
After 2025, the second three lines will once again be the same as the first three lines.
6. Mortgage Interest Deduction
Mortgage interest paid on a main or second home has typically been deductible as an itemized deduction.
If the mortgage balance was over $1 million, the deduction was limited to interest on the first $1 million ($500,000 if married filing separately).
In addition, mortgage on home equity lines of credit was deductible, up to a balance of $100,000.
For mortgages taken out during the term of the act, the $1 million limit has become $750,000 ($375,000 if married filing separately).
Also, during this term, home equity interest is not deductible at all.
Where to find it.
The software now asks three additional questions for each mortgage:
The software then uses the answers to these questions to determine the limits that apply to that mortgage.
For existing files, the software assumes that the first mortgage is an acquisition mortgage and the second was a home equity line. This means that interest on existing second mortgages will not be deductible.
Please check these entries for all existing files. If the second mortgage was used to buy or renovate a main or second home, please check that box.
To calculate the deductible mortgage interest, the software goes through all mortgage payments made by each individual each year, aggregating the combined end-of-year mortgage balances against the respective limits.
The mortgage balance allocated to rental real estate is omitted from this calculation. Interest on mortgages on rental real estate are fully deductible as a business expense, as before.
The software first applies the $750,000 limit to all mortgages taken out after December 15, 2017 and before January 1, 2026.
If there are mortgages that were taken out before or after that period, the software then applies any remaining limit, up to $1 million, to those mortgages.
Interest on home equity mortgages is deductible only before or after the tax act term.
There is a report that shows in detail how this is done.
The report is available on a "more info" link below the data entry section for the second mortgage. A link to this report is also located next to the line for mortgage interest on the View/Edit Taxes report.
7. Miscellaneous Itemized Deductions.
Miscellaneous itemized deductions are those which are deductible only to the extent that, in total, they exceed 2% of adjusted gross income.
Importantly to many, they include deductions one incurs as an employee, the home office deduction, and the deduction for the cost of tax preparation.
In the software, these items are Living Expenses whose Tax Category is specified to be "Other Itemized Deduction." (You can find the tax category on the "more info" screen for the line where you enter the living expense.)
During the term of the act, none of these items are deductible.
Where to find it.
On the View/Edit taxes report, you will see that the line for Miscellaneous subject to 2% AGI threshold computes to zero. This applies for 2018 through 2025.
Starting in the year 2026, these deductions are once again added up and deducted to the extent that they exceed 2% of adjusted gross income, on that line.
8. Limitation on Itemized Deductions
The deductibility of itemized deductions may be limited for upper income taxpayers. The total amount of the itemized deductions one may claim is reduced if one's adjusted gross income exceeds a threshold based on filing status. The reduction is either 3 percent of the amount by which your AGI exceeds the threshold, or 80 percent of total itemized deductions, whichever is less. For 2018, the thresholds were scheduled to be $266,700 for a single taxpayer, $293,350 if head of household, $160,000 if married filing separately, and $320,000 if married filing jointly.
This reduction is eliminated.
This increases the amount of itemized deductions that may be deductible for taxpayers whose incomes exceed the AGI thresholds indicated above.
The reduction returns after 2025.
Where to find it.
During the years the act applies, on the View/Edit Taxes report, the line for Itemized Deductions After Phaseout will be the same as the line for Itemized Deductions Before Phaseout.
After 2026, the phaseout will reappear.
9. Standard Deduction.
The standard deduction provides a deduction to all taxpayers who do not itemize.
During the term of the act, the standard deduction amounts are significantly increased.
The standard deduction is now are $12,000 for a single or married filing separate individual, $24,000 for a couple filing jointly, and $18,000 for an individual filing as head of household.
For 2018, before the act passed, these numbers were scheduled to be $6,500, $13,000, and $9,550, respectively.
Where to find it:
The software's standard deduction reflects these numbers. They will increase from this point for inflation going forward.
In projections starting in the year 2026, the standard deduction will revert to the 2017 numbers, adjusted for projected inflation.
10. Personal Exemptions.
The personal exemptions line provided a deduction for the taxpayer, his spouse if filing jointly, and each qualifying child.
In 2018, this deduction was scheduled to be $4,150 for each such person.
The designation of personal exemption also specifies the person who receives the Child Tax Credit.
During the term of the 2017 tax act, the personal exemption amount is zero -- there is no deduction for personal exemptions for the parties or the children.
The designation of "Who claims exemption" in the software still determines who gets to claim the Child Tax Credit, however. And this credit is at least twice as valuable as before (see discussion of Child Tax Credit, below.)
Where to find it.
On the View/Edit Taxes report, you will see that the personal exemptions line computes to zero during these years.
Starting in 2026, the prior personal exemption will be restored, increased by projected inflation in the interim.
The designation of which party claims the exemption still determines which party gets the Child Tax Credit.
11. Deduction for Income of Pass-Through Entities
This is a new provision of the 2017 tax act.
It applies to sole proprietors (Schedule C filers), general and limited partners in partnerships, and owners of S corporations.
It also applies to dividends from REITs (real estate investment partnerships) and publicly traded partnerships.
In general, owners of pass-through entities will get a deduction of 20% of the net income.
There are many qualifications and limitations.
If the taxpayer's taxable income (before this deduction) is less than $157,500 per business ($315,000 if married filing jointly), however, these limitations will usually not apply and the deduction will be 20% of the business's net income.
For the next $50,000 of taxable net income (before this deduction) above that ($100,000 if filing jointly), some or all of the deduction may be phased out.
Here is how you compute the phase-out for businesses that are NOT service businesses:
1. Compute 50% of the taxpayer's allocable share of all W-2 income paid by the business.
2. Compute 25% of this income + 2.5% of the original cost all capital in service and not depreciated by year end.
3. Take the larger of these two. (Let's call it the W-2/Capital amount.)
If the W-2/Capital amount is more than 20% of the business's net income,
4. Then the deduction is 20% of business income.
If the W-2/Capital amount is less than 20% of the business's net income...
5. Take the amount by which the W-2/Capital amount is less than 20% of the business's net income.
6. Multiply this difference by (1 - the fraction of the phase-out range that is reached by taxable income). For taxable incomes between $157,500 and $207,500, the fraction would be the fraction of this $50,000 range that is reached by taxable income. For taxable incomes over $207,500, the fraction would be zero. (For simplicity, we will look only at filing statuses other than joint for the remainder of this discussion.)
7. Add this result to the W-2/Capital amount. That is the deduction.
An additional limitation applies if this is a service business (lawyer, doctor, accountant, financial advisor, etc., but explicitly not architect or engineer).
1. For service business income up to the $157,000 threshold, there is no limitation. 20% is deductible.
2. The income of the service business for purposes of the deduction, and the W-2 and capital amounts are reduced.
3. The reduction is so much of taxable income as lies in the range between $157,000 and $207,000. For example, if taxable income is $167,000, then the reduction is 20%, and so 80% of income, W-2, and capital assets are considered for purposes of the deduction.
Where to find it.
There is a report that shows how the software works through the limitations and arrives at the deduction.
You can get to this worksheet on the "more info" page for any business.
It is also available next to the line for this deduction on the View/Edit Taxes report.
12. Child Tax Credit
The child tax credit has for years given a credit of $1,000 for each child who is a dependent of the taxpayer under age 17 (that is 16 or younger) at the end of the tax year.
A portion is refundable (that is, it is paid by the government to the taxpayer if there is no tax to offset it).
The refundable portion is typically calculated as 15% of earned income over $3,000.
The child tax credit phases out for incomes above a threshold: $75,000 if single or head of household, $55,000 if married filing separately, $110,000 if filing jointly.
The phase-out is $50 for every $1,000 of adjusted gross income over the threshold.
Neither the credit nor the phase-outs are adjusted for inflation.
The credit is designated to the person who claims the exemption for the child.
We believe that parties may agree to confer the exemption on whichever parent they choose, and that this will also confer the child tax credit, as it has done in the past.
The short answer to why we think this is that the statute with respect to the exemption says:
(5) SPECIAL RULES FOR TAXABLE YEARS 2018 THROUGH 2025.
�In the case of a taxable year beginning after December 31, 2017, and before January 8 1, 2026
(A) EXEMPTION AMOUNT.�The term "exemption amount" means zero.
The result of this approach is that all the other statutory language surrounding exemptions -- including their negotiability and impact on designation of the child credit -- remains intact.
The credit amount was increased to $2,000 per qualifying child.
The threshold was increased to $200,000 ($400,000 if filing jointly). The effect of this is to continue the credit for more higher-income taxpayers.
In addition, there is a credit of $500 for each child who is a dependent but over age 16 at the end of the calendar year. This will apply to children who are age 17 and above, who may still be claimed as exemptions by the party.
When the tax act expires in 2026, the child credit amount and thresholds will revert to what they were.
Where to find it.
The child credit is calculated internally in the software.
The calculation will reflect these changes on the View/Edit Taxes line for the Child Tax Credit.
The child credit is still given to the person who is specified as claiming the exemption for the child.
13. Alternative Minimum Tax
The Alternative Minimum Tax is actually an entire parallel tax system.
Taxpayers pay the higher of the regular tax or the tax calculated under this system.
Alternative minimum taxable income is calculated by starting with regular taxable income and adding back state and local tax deductions, home equity mortgage interest, the personal exemptions, the standard deduction, a portion of medical deductions, some capital gain income, miscellaneous itemized deductions, and other things.
There is an exemption, below which no alternative minimum taxable income is taxable.
This exemption in 2018 was scheduled to be $55,400 for single or head of household, $86,200 if filing jointly, and half that if married filing separately.
Above that exemption, income is taxed at 26%, and then at 28%.
For income above another threshold, the benefit of the no-tax region is phased out.
This threshold in 2018 was scheduled to be $123,100 for single or head of household, 164,100 if filing jointly, and half that if married filing separately.
The threshold for no taxation was increased to $70,300 for single or head of household, $109,400 if filing jointly, and half that if married filing separately.
The threshold above which the no-taxation benefit is phased out was increased to $1 million if filing jointly, and half that ($500,000) for everyone else.
The combination of having fewer items to add back (less state and local taxes, no exemptions), a higher no-tax region, much less phase-out of the no-tax region, and generally lower regular taxes, is that few if any taxpayers with income less than $1 million will be subject to the Alternative Minimum Tax during the tax act years.
As before, the thresholds are adjusted for inflation.
This provision reverts when the act term expires in 2026.
Where to find it.
On the View/Edit Taxes line for the Alternative Minimum Tax, there is a complete report.
During the years of the 2017 tax act, the report will reflect those provisions.
After the 2025, the report will reflect the prior provisions, with thresholds adjusted for projected inflation in the interim.
14. Selected Act Provisions Not Reflected in Software
The following are some provisions of the tax act that are not reflected in the software, because they did not affect any of the software's calculations.
Kiddie tax. For children under the age of 21 who have significant investment income, their income is now taxed at the rates applicable to estates and trusts -- essentially equivalent to the top income tax rates of individuals. They are no longer required to coordinate their taxes with those of their parents and siblings.
Charitable contributions. Charitable contributions of cash are now deductible to the extent of 60% of adjusted gross income. Previously this number was 50%. Charitable contributions of appreciated property, such as appreciated stock, are still deductible up to 30% of adjusted gross income.
The child tax credit is also modified to temporarily provide for a $500 nonrefundable credit for qualifying dependents other than qualifying children.
15. Impact on Child Support
In states where federal income tax is not a component of child support calculation, there is no impact.
Where the federal income tax is a component of child support, the impact on support will depend on the tax impact on the individuals.
Generally speaking, we may expect, for example, that if the payer's federal tax diminished and the recipient's tax was unchanged, the payer's child support obligation would increase.
Under the act, however, that did not happen.
Under the act, typically, both parties' federal income tax obligations would diminish. So then the overall effect depends on relative impacts.
We explored a number of scenarios, and, in many cases, we found that the net impact on child support of the tax act was negligible.
However, it was not always the case, and it can certainly vary depending on the case facts.
In our presentation on the tax act, you can see detail on the scenarios we ran, starting at slide 33.