The biggest tax news in recent years was, of course, the enactment of the 2017 Tax Cuts and Jobs Act (TCJA). And, while the major changes made by the law applied to the 2018 returns you recently filed for your clients, some “stragglers” will apply for the first time in 2019.
While the new law changes taking effect in 2019 are not numerous, they are significant.
The first — and, perhaps, most dramatic — law change is the major shift in the tax treatment of alimony payments under divorce of separation agreements executed on or after Jan. 1, 2019 [IRC Sec. 71, 215 repealed]. Under prior law, alimony payments were deductible by the payor spouse and includable in income by the payee. By contrast, under the new law change, the reverse is true: Alimony is not deductible by the payor and is not included in income by the payee.
Under longstanding tax law rules, out-of-pocket medical expenses were allowed as an itemized deduction to the extent they exceeded 7.5 percent of a taxpayer’s adjusted gross income (AGI). Starting in 2012, a law change raised the deduction floor to 10 percent for most taxpayers, although the 7.5 percent floor continued to apply through 2016 if either the taxpayer or the taxpayer’s spouse had reached age 65 before the close of the year. The TCJA restored the 7.5 percent deduction for all taxpayers for 2017 and 2018 only. As a result, the medical expense deduction floor will reset to 10 percent for all taxpayers for 2019 [IRC Sec. 213(f)].
Individual Shared Responsibility Penalty
A provision enacted by the 2010 Affordable Care Act provides that individuals who do not have minimum essential health coverage must pay a penalty unless they qualify for exemption from the health coverage requirement. However, starting in 2019, the TCJA effectively repeals the individual shared responsibility penalty by reducing the penalty amount to zero [IRC Sec. 5000A(c)].
To assist individuals in complying with the health coverage requirement, the law requires insurers and self-insured employers to file annual returns with the IRS reporting information for each individual who is provided with minimum essential coverage and to provide written statements to those individuals showing the information to be reported on their tax returns. However, because the individual shared responsibility payment is reduced to zero after 2018, the IRS has indicated that it is studying how the reporting requirements should change, if at all, for future years.
401(k) Hardship Distributions
The 401(k) retirement plan rules allow for distributions to an employee on account of hardship. Under IRS regulations, these distributions have been permitted only in the event of an immediate and heavy financial need of the employee, only in the amount necessary to meet that need, and only to the extent of an employee’s elective contributions (plus earnings). For this purpose, a distribution was deemed necessary to satisfy an immediate and heavy financial need only if the employee first obtained all other available distributions and loans under the plan. Moreover, an employee receiving a hardship distribution was barred from making contributions to the plan for at least six months following the receipt of the distribution. However, a law change made by the Bipartisan Budget Act of 2018 made three important changes to the hardship distribution rules for plan years beginning after 2018:
- The law directs the IRS to modify its regulations to delete the six-month prohibition on employee contributions following a hardship distribution [Budget Act Sec. 41113].
- The law expands the funds that can be distributed on account of hardship to include contributions to a profit-sharing or stock bonus plan, qualified nonelective contributions, matching contributions, and earnings on those contributions [IRC Sec. 401(k) (14)(A)].
- The law provides that distribution won’t fail to be treated as made on account of hardship solely because the employee doesn’t take any available loan under the plan [IRC Sec. 401(k)(14)(B).
Paid Family and Medical Leave Credit
In contrast to the provisions discussed, the employer credit for family and medical leave doesn’t apply for the first time in 2019; it applies for the last time. The TCJA created a new income tax credit for employers that provide paid family and medical leave for employees — but only for tax years beginning after Dec. 31, 2017, and before Jan. 1, 2020 [IRC Sec. 45S].
The credit is equal to 12.5 percent of wages paid to qualifying employees who are on family and medical leave, provided the employees are paid at least 50 percent of their normal wages. The amount of the credit is increased by 0.25 percentage points up to a maximum of 25 percent for each percentage point by which the rate of payment to the employee exceeds 50 percent. Thus, an employer who pays 100 percent of an employee’s wage during a period of leave will qualify for a credit of 25 percent of wages paid. The maximum period of leave for which the credit can be claimed is 12 weeks. For purposes of the credit, “family and medical leave” is defined as leave for purposes described in the Family and Medical Leave Act (FMLA). However, the credit may be claimed by employers who are not subject to the FMLA and for leave provided to employees who do not qualify for FMLA leave.
To be eligible for the credit, the employer must have a written policy that allows all qualifying full-time employees not less than two weeks of annual paid family and medical leave, with a pro rata amount of leave provided to employees who work less than full time. Qualifying employees are those who have been employed by the employer for one year or more, and whose compensation from the employer for the preceding year did not exceed 60 percent of the compensation threshold for highly compensated under the tax law. Thus, for 2019, an eligible employee’s compensation cannot exceed $75,000 (60 percent x $125,000 compensation threshold for 2019).
Employers still have a window of opportunity to take advantage of the credit for 2019 — if they act promptly. As a general rule, the employer’s written policy must be in place before an employee takes family and medical leave for which the employer claims the credit. So, for example, if an employer adopts a written policy with an effective date of July 1, 2019, the employer may claim the credit for qualifying leave taken on or after July 1, 2019.
Also noteworthy are tax breaks that will not show up on 2019 returns. At the time of this writing, Congress has not acted to extend temporary tax deductions, credits and other provisions that have expired. As noted above, these unextended “extenders” include the 7.5 percent deduction floor for medical expenses, which expired in 2018. In addition, the following individual tax provisions, which expired at the end of 2017, have yet to be extended:
- The exclusion for discharge of indebtedness on a principal residence [IRC Sec. 108].
- Treatment of mortgage insurance premiums as deductible qualified residence interest [IRC Sec. 163].
- The above-the-line deduction for qualified tuition and related expenses [IRC Sec. 222].
- The nonbusiness energy credit for energy-efficient improvements to a principal residence [IRC Sec. 25C].
Editor’s note: The Intuit® ProConnect™ Tax Pro Center has a full library of articles about tax reform.