Editor’s note: Longtime ASJA member Julian Block is an attorney and author based in Larchmont, N.Y. He has been cited as: “a leading tax professional” (The New York Times); “an accomplished writer on taxes” (Wall Street Journal); and “an authority on tax planning” (Financial Planning Magazine).
This article was originally published in the winter 2018-19 issue of ScienceWriters magazine © 2019. Republished with permission of the National Association of Science Writers (nasw.org) and courtesy of Julian Block.
In these tumultuous tax times, my clients bombard me with questions. Many of their queries concern Public Law No. 115-97, aka the Tax Cuts and Jobs Act (TCJA), signed by President Donald J. Trump on Dec. 23, 2017, just before Santa arrived.
Both supporters and opponents of the TCJA consider it to be the most comprehensive overhaul of the Internal Revenue Code since President Ronald Reagan signed the historic Tax Reform Act of 1986.
While clients beamed because the centerpiece of the president’s tax package was lower rates for individuals and corporations, I cautioned them that it would be premature to uncork the bubbly.
I explained that the wide-ranging legislation did lots more than lower their rates. It also curtailed or eliminated many of their long-cherished write-offs, starting with 1040s for 2018 to be filed in 2019.
So then, clients ask, does the president’s mix of rates lowered and deductions discarded or diminished mean he’ll cause their tax tabs to increase or decrease? That kind of question, I respond, doesn’t lend itself to a precise answer. How things turn out depends on the kinds of income they receive and the deductions they claim.
What follows are highlights of some changes that particularly target many millions of unsuspecting Americans, freelance writers among them, who previously gained more by using Form 1040s Schedule A to “itemize” their deductions than by using the standard deduction amounts that are available only for those who don’t itemize.
Itemizers had become accustomed to submitting 1040s on which they claimed sizable write-offs for payments like interest on their home mortgages, state and local income taxes and property taxes, and charitable donations.
Payments for Medical Care
The IRS already made it difficult for itemizers to deduct such payments. The big barrier: Generally, they’re allowable only to the extent that they exceed 7.5 percent of a person’s adjusted gross income.
However, a frequently overlooked exception will continue to be available for 2018 and later years for NASW members and other freelancers who make payments for health insurance. Their payments aren’t subject to the 7.5 percent threshold. Another plus: They get to claim such payments, regardless of whether they itemize or use the standard deduction.
Fees for Tax Return Prep, Tax Planning, and Fighting IRS Audits
The IRS similarly made it hard for itemizers to deduct such fees. Generally, they’re deductible only to the extent that they exceed 2 percent of adjusted gross income.
However, the TCJA left unchanged a long-standing exception that allows fee splitting for that portion of tax preparation and planning fees that are reasonably allocable to: Schedule C (profit or loss from business); Schedule E (income from renting vacation homes or other properties, royalties, partnerships, and S corporations); or Schedule F (profit or loss from farming).
Freelance writers, along with other taxpayers, can continue to use such fees on Schedules C, E, or F to offset business, rental or farming income. Ditto, says the IRS, when they pay fees to fight audits of Schedule C, E, or F activities.
Note that the TCJA sharply increased the standard deduction amounts available to individuals who opt not to itemize. Given that change, what should I say when it’s no longer worthwhile for them to itemize?
I cite a maneuver that allows them to lose less to the IRS: Stop itemizing. Start using the standard deduction, a tactic that requires them to accept the loss of tax benefits when paying for things like interest, state and local taxes, contributions, medical care and tax advice.
What should I say when it remains worthwhile for them to itemize? They need to curb their enthusiasm. The actual tax benefit of their itemized deductibles might prove to be modest, barely exceeding their standard deduction, something that’s especially true for married persons when both spouses are older than 65.
To balance the books, former itemizers who switch to the standard deduction aren’t locked into using it in future years, as each year stands on its own. It’s okay the following year to resume itemizing and deduct payments for charitable contributions and the like.