Source: https://tjaglcspublic.army.mil/us-tax-reform
Timestamp: 2019-04-20 06:27:53+00:00

Document:
On 22 December 2017, the president signed into law P.L. 115-97 (the “Act”).1 The Act represents the largest overhaul of the U.S. Internal Revenue Code since the Tax Reform Act of 1986.2 Specifically, the Act lowers individual tax rates and increases the standard deductions, while modifying or repealing a number of other previously available deductions, generally effective 1 January 2018. Absent further Congressional action, since the Act was passed under the Senate “budget reconciliation” rules, most of the individual provisions are scheduled to sunset after 2025. This article summarizes the most important changes affecting service members.
Prior to the Act, alimony payments and certain separate maintenance payments were available for an above-the-line deduction by a payor spouse, while receipt of such payments was includable as gross income by a payee spouse.6 For divorces effective after 31 December 2018, however, the Act provides that alimony payments will neither be deductible by a payor spouse,7 nor includible by a payee spouse. This provision will not sunset after 2025.
An individual who does not itemize deductions may reduce his or her adjusted gross income by taking a standard deduction.14 In 2017, the amount of the standard deduction was $12,700 for married individuals filing a joint return, $6,350 for individual filers, and $9,350 for single filers with at least one qualifying child.15 The Act increases the standard deduction to $24,000 for married individuals filing a joint return, $12,000 for individual filers and married individuals filing separately, and $18,000 for single filers with at least one qualifying child.16 Due to the increased standard deductions and the reduction of available itemized deductions discussed below, fewer taxpayers will itemize their deductions. In addition, those who itemize their deductions may find it useful to “bunch” their itemized deductions in one year, such as making two years of charitable contributions in one year, and then taking the standard deduction in the following year.
One of the biggest changes that will affect service members concerns the itemized deduction for state and local taxes not incurred in a trade or business. Prior to the Act, the Code generally permitted taxpayers to deduct state and local income, property, and sales taxes.17 The Act limits the deduction of state and local taxes to a combined total of $10,000.18 As a result, state and local taxes in excess of $10,000 are not deductible, unless the deduction relates to a trade or business.19 Service members from high income tax states such as California, Massachusetts, and New York are likely to be significantly affected by this change.
Prior to the Act, taxpayers generally received a $1,000 child tax credit per qualifying child.29 In general, the Act increases the child tax credit to $2,000 per child subject to certain limitations for each qualifying child.30 In addition, the Act increases the phaseout gross income level limitation for claiming the credit from $110,000 to $400,000 for married taxpayers filing jointly and from $75,000 to $200,000 for single filers.
LTC (Ret.) Samuel Kan is the Assistant Dean of Academic Success and Bar Preparation and Assistant Professor of Law at Barry University School of Law, in Orlando Florida. He previously served as tax counsel at the Department of Defense’s Office of General Counsel.
1. Tax Cuts and Jobs Act, Pub. L. No. 115-97, 131 Stat. 2054 (2017).
2. Tax Reform Act of 1986, Pub. L. No. 99-514, 100 Stat. 2085.
3. Tax Cuts and Jobs Act § 11001.
4. Tax Cuts and Jobs Act § 11002. See generally Sho Chandra, What You Need to Know About Chained CPI, Bloomberg (Nov. 20, 2017), https://www.bloomberg.com/news/articles/2017-11-20/why-chained-cpi-has-links-to-u-s-tax-debate-quicktake-q-a. For example, in 2017 “the threshold at which a single filer move[d] from a 25 percent tax bracket to a 28 percent bracket [was] $91,900. [In 2016,] it was $91,150. It gets adjusted upward to account for inflation, to spare taxpayers from what’s known as bracket creep. If chained CPI were used to calculate the next adjustment, rather than traditional CPI, the 28 percent rate might kick in just a tiny bit earlier–say, at $92,600 of income, instead of $92,700.” Id.
5. Tax Cuts and Jobs Act § 12003.
6. See I.R.C. § 61(a)(8) (2012) (including alimony and separate maintenance payments as gross income of the payee spouse); I.R.C. §§ 62(a)(10), 215(a) (excluding those payments from the payor spouse’s gross income in the form of an above-the-line deduction).
7. Tax Cuts and Jobs Act § 11051.
8. See I.R.C. § 132(g) (2012) (permitting an itemized deduction for moving expenses paid or incurred in connection with the commencement of work by the individual taxpayer as an employee or as a self-employed individual at a new principal place of work).
9. See generally Internal Revenue Service, Armed Forces’ Tax Guide, publication 3 (Feb. 20, 2018).
10. Tax Cuts and Jobs Act § 11048.
11. I.R.C. §§ 62(a)(15), 217 (2012).
12. Tax Cuts and Jobs Act § 11049.
13. Internal Revenue Service, Armed Forces’ Tax Guide, publication 3 (Feb. 20, 2018).
14. I.R.C. § 63 (2012).
15. Internal Revenue Service, Itemize or Choose the Standard Deduction (Feb. 21, 2017), https://www.irs.gov/newsroom/itemize-or-choose-the-standard-deduction.
16. Tax Cuts and Jobs Act § 11021. See also H.R. Rep. No. 115-466, at 201 (2017) (outlining the difference between the House and Senate versions of the Tax Cuts and Jobs Act, in which the House version proposed to increase the standard deduction to $24,400 for married individuals filing a joint return, $12,200 for individual filers, and $18,300 for single filers with at least one qualifying child).
17. I.R.C. § 164 (2012).
18. Tax Cuts and Jobs Act § 11042.
19. See generally I.R.C. § 212 (2012) (permitting an itemized deduction for an individual if such expense relates to the production of income, or the management or maintenance of property held for the production of income).
20. I.R.C. §§ 163(h)(2)(D), (h)(3) (2012).
21. Tax Cuts and Jobs Act § 11043.
22. H.R. Rep. No. 115-466, at 258 (2017).
23. Tax Cuts and Jobs Act § 11043. See also Interest on Home Equity Loans Often Still Deductible Under New Law, Internal Revenue Service (last visited Sept. 1, 2018), https://www.irs.gov/newsroom/interest-on-home-equity-loans-often-still-deductible-under-new-law.
24. I.R.C. § 67(a) (2012).
25. See generally Internal Revenue Service, Publication 529, Miscellaneous Deductions (Jan. 26, 2018) (noting the difference between travel expenses and travel in excess of 100 miles provided by military reserve component members, which is treated as an above-the-line deduction or adjustment under Internal Revenue Code section 62(a)(2)(E)).
26. Internal Revenue Service, Publication 529, Miscellaneous Deductions (Jan. 26, 2018) (noting an employee that has an ordinary and necessary business-related expense for travel away from home may be deductible as a miscellaneous itemized expense so long as the travel does not relate to an indefinite work assignment).
27. Tax Cuts and Jobs Act § 11045.
28. See id. For clarification, National Guard and military reserve component members who travel in excess of 100 miles to their duty station may still utilize adjustments provided under Internal Revenue Code section 62(a)(2)(E).
29. See generally I.R.C. § 24 (2012) (defining a qualifying child to meet the following requirements: (i) must be under the age of seventeen years old by the end of the tax year; (ii) must be the taxpayer’s son, daughter, stepchild, foster child, brother, sister, stepbrother, stepsister, or a descendant of any of these individuals, including the taxpayer’s grandchild, niece, or nephew; (iii) must have more than half of the support provided by the taxpayer; (iv) must be claimed as a dependent on the taxpayer’s tax return; (v) must be a U.S. citizen, U.S. national, or U.S. resident alien; and (vi) must have lived with the taxpayer for more than half of the tax year). Other limitations apply, such as a reduction in the child tax credit by $50 for each $1,000 of modified adjusted gross income that exceeds $110,000 for married taxpayers filing jointly or $75,000 for single individual taxpayers.
30. Tax Cuts and Jobs Act § 11022.

References: § 11001
 § 11002
 § 12003
 § 61
 § 11051
 § 132
 § 11048
 § 11049
 § 63
 § 11021
 § 164
 § 11042
 § 212
 § 11043
 § 11043
 § 67
 § 11045
 § 24
 § 11022