Barry University: Digital Commons @ Barry Law

Samuel, Kan

Barry University School of Law 
Digital Commons @ Barry Law 
Faculty Scholarship 
2019 
U.S. Tax Reform: Considerations for Service Members [notes] 
Kan Samuel 
Follow this and additional works at: https://lawpublications.barry.edu/facultyscholarship 
 Part of the Banking and Finance Law Commons, Taxation-State and Local Commons, and the 
Taxation-Transnational Commons 
U.S. Tax Reform
Considerations for Service Members
By Adam G. Province & Samuel Kan, CFP
Introduction
On 22 December 2017, the president signed
into law P.L. 115-97 (the "Act").' 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 summa-
rizes the most important changes affecting
service members.
Reduction in Individual Tax Rates
The Act retains the current seven-bracket
individual tax rate structure but temporarily
lowers tax rates and modifies income levels
for some brackets. Over time, however,
taxpayers will gradually find themselves
in higher tax brackets due to a newly
adopted "chained" Consumer Price Index
(CPI) approach, which will not sunset after
2025.4 The Act also modifies the individual
Alternative Minimum Tax.
Exclusions from Gross
Income Alimony Payments
Prior to the Act, alimony payments and cer-
tain 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 pro-
vides that alimony payments will neither be
deductible by a payor spouse,7 nor includi-
ble by a payee spouse. This provision will
not sunset after 2025.
Issue 1 2019 * Practice Notes * ArmV Lawyer
Exclusion for Employer Moving
Expense Reimbursement
Prior to the Act, qualified moving expense
reimbursements provided by an employer
to an employee were excluded from the
employee's gross income.8 For service mem-
bers, moving and storage reimbursements
and allowances were similarly excluded.'
While the Act suspends the exclusion of
such moving expense reimbursements for
civilians until after 31 December 2025,
the exclusion is preserved for eimburse-
ments and allowances received by service
members.0
Out-of-Pocket Moving Expenses
Prior to the Act, qualified moving ex-
penses not covered by an employer's
reimbursement generally were allowed
as an above-the-line deduction from an
employee's gross income if certain distance
and employment status requirements were
met." The Act suspends the deduction for
moving expenses for civilian employees
until after 31 December 2025. However, the
suspension does not apply to service mem-
bers.2 Consequently, service members may
be able to deduct out-of-pocket expenses
related to a permanent change of station
(PCS) if certain requirements are met.
Deductions
Standard Deduction
An individual who does not itemize deduc-
tions may reduce his or her adjusted gross
income by taking a standard deduction.4 In
2017, the amount of the standard deduction
was S 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.5 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 S 18,000 for single fil-
ers with at least one qualifying child.6 Due
to the increased standard deductions and
the reduction of available itemized deduc-
tions 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.
Itemized Deductions
State and Local Tax Deductions
One of the biggest changes that will
affect service members concerns the item-
ized 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.' The Act limits the deduc-
tion of state and local taxes to a combined
total of S10,000. " As a result, state and
local taxes in excess of $10,000 are not
deductible, unless the deduction relates to a
trade or business.9 Service members from
high income tax states such as California,
Massachusetts, and New York are likely to
be significantly affected by this change.
Mortgage Interest Deduction
Prior to the Act, individuals could
deduct mortgage interest expenses related
to a qualified residence for mortgage debt
up to $1 million for married taxpayers or
$500,000 for single taxpayers.20 The Act
reduced the amount of interest expense
deductible under the Code.2 ' Specifically,
interest for indebtedness related to a
mortgage incurred after 14 December 2017,
is only deductible for mortgage debt up to
$750,000 for taxpayers who are married
filing jointly and $375,000 for those who
are single.22 Existing mortgages as of 14
December 2017, continue to be subject to
the prior $1 million limitation. In addition,
the Act repeals the prior separate deduction
for interest paid on home equity loans.
23
Miscellaneous Itemized Deductions
Prior to the Act, individual taxpay-
ers could claim an itemized deduction for
certain miscellaneous expenses as long as
29
the total of such expenses exceeded two
percent of the individual taxpayer's adjusted
gross income.2 One commonly used
miscellaneous itemized deduction applied
to National Guard and reserve component
members who did not receive expense
reimbursement for travel 100 miles or less
to their duty station.25 Common expenses
included costs for traveling to and from the
destination, meals and lodging while away
from home, baggage charges, and laundry
expenses. Travel, if unreimbursed, generally
was permitted as a miscellaneous itemized
deduction.2 6 The Act repeals all the miscel-
laneous itemized deductions.27 As a result,
National Guard and reserve component
members can no longer deduct these.28
Increase of the Child Tax Credit
Prior to the Act, taxpayers generally received
a S1,000 child tax credit per qualifying
child.2 9 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.
Individuals performing services
in the Sinai Peninsula of Egypt
In general, service members receive
numerous tax benefits if they serve in
combat zones, qualified hazardous duty
areas, or areas in direct support of military
operations in combat zones or qualified
hazardous duty areas. Prior to the Act, ser-
vice members serving in the Sinai Peninsula
of Egypt did not receive these benefits.
The Act, however, designated the Sinai
Peninsula as a qualified hazardous duty area
retroactive to 9 June 2015.' As a result,
service members serving in the Sinai now
qualify for benefits such as the exclusion
of certain military pay from their gross in-
come and extensions of time for filing their
tax returns.32
Spousal Residency
In addition to the changes made by the Act,
Section 302 of the Veterans Benefits and
Transition Act of 2018 allows for mili-
tary spouses to elect to use the same legal
residence as the Servicemember during
any taxable year of the marriage begin-
ning with the 2018 tax year. In short, it
will allow a military spouse to elect the
residence of the Servicemember even if
the spouse might not otherwise have the
requisite connections with the state where
the Servicemember has legal residence or
domicile. TAL
LTC (Ret.) Samuel Kan is the Assistant Dean
of Academic Success and Bar Preparation and
Assistant Professor of Law at Barry University
School ofLaw, in Orlando Florida. He previously
served as tax counsel at the Department of
Defense's Office of General Counsel.
Notes
1. Tax Cuts andJobs 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 andJobs Act § 11001.
4. Tax Cuts andJobs 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] 391,900. [In 2016,] it was 391,150. It gets
adjusted upward to account for inflation, to spare tax-
payers 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 392,600 of income, instead
of 392,700." Id.
5. Tax Cuts andJobs 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 andJobs 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-em-
ployed 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 andJobs 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 andJobs
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 man-
agement or maintenance of property held for the
production of income).
20. I.R.C. §§ 163(h)(2)(D), (h)(3) (2012).
21. Tax Cuts andJobs Act § 11043.
22. H.R. Rep. No. 115-466, at 258 (2017).
23. Tax Cuts andJobs 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 com-
ponent 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 em-
ployee 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, step-
child, 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 375,000 for single individual taxpayers.
30. Tax Cuts and Jobs Act § 11022.
31. Id. § 11026.
32. Id.
Army Lawyer * Practice Notes * Issue 1 201930


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