The enactment of the 2017 Tax Cuts and Jobs Act (TCJA) brought sweeping change to the tax landscape and affected just about everyone. Although the majority of the changes made by the Internal Revenue Service applied to tax year 2018 returns, there are several significant changes that will apply for the first time in tax year 2019.
Alimony payments are no longer deductible
Up until 2019, alimony payments to an ex-spouse were deductible by the ex-spouse who made them and were considered taxable income by the recipient. Starting in 2019, the deduction for alimony payments for the payer spouse can no longer be deducted. Furthermore, it cannot be included in the income for the receiving spouse. The IRS released some clarification to this ruling stating that the change only affects alimony or separate maintenance payments made under a divorce or separation agreement executed after December 31, 2018. It also applies to divorce and separation agreements modified after December 31, 2018. The old rules continue to apply to divorces finalized before January 1, 2019.
Medical expenses harder to deduct
Only out-of-pocket medical expenses incurred on or after January 1, 2019 that are more than 10% of (adjusted gross income) AGI are allowed as an itemized deduction. Prior to 2019, taxpayers were allowed as an itemized deduction to the extent they exceeded 7.5 percent of their AGI. Comparing 2018 vs. 2019, a taxpayer with an AGI of $50,000 and out-of-pocket medical expenses of $7,500 would only be able to deduct $2,500 in 2019 whereas the deduction would’ve been $3,750 in 2018.
- Tax Year 2019: $50,000 AGI x 10% = $5,000. Deduction = $2,500 ($7,500 – 5,000)
- Tax Year 2018: $50,000 AGI x 7.5% = $3,750. Deduction = $3,750 ($7,500 – 3,750)
401K hardship distributions rules relaxed
401(k) retirement plans allow for distributions to employees in the event of hardship for expenses such as medical expenses, preventing eviction or foreclosure, purchasing a home, tuition for higher education expenses, funeral expenses for a family member or natural disasters. In the past, the employee would be required to first obtain all other available distributions and loans under the plan and refrain from making contributions for six months after the distribution.
The IRS has since relaxed those rules and made the following changes:
- Eliminated the six-month contribution-suspension requirement
- Employees no longer need to take 401K plan loan before a hardship withdrawal
- Distributions can now be made from earnings (previously only from contributions)
Affordable Care Act’s Individual Tax Penalty Eliminated
The Affordable Care Act of 2010 required individuals to have minimum essential health coverage or be subject to a penalty unless they qualified for exemption from the health coverage requirement. That penalty has since been eliminated at the federal level for tax year 2019 and later. Please note: some states have enacted state-wide mandates for minimum health coverage starting in 2019 or later so please check your respective state’s laws.
Paid family and medical leave credit for employers
Employers now benefit from a new income tax credit if they provide paid family and medical leave for employees, but only for tax years beginning after Dec. 31, 2017, and before Jan. 1, 2020. To be eligible for the credit, employers must have a written policy in place that allows at least two weeks of paid leave to full-time employees (prorated for part-time employees) and the paid leave must be at least 50% of the wages normally paid to the employee.