Written by Christine Quiñones
The new tax law passed by Congress this past December is the most profound restructuring of the United States tax code in thirty years – an entire working lifetime for many of us linguists. As an accountant and tax preparer as well as a freelance translator, I have a dual perspective on the changes in store for 2018 and future years. In this article, I provide a review of the provisions in the law that are of particular interest to translators and interpreters.
To begin, it’s important to note that most of these provisions are effective for tax year 2018 and later. Tax returns for the year just ended (tax year 2017) will be filed under the old rules, so taxpayers will have plenty of time to make appropriate adjustments to their business practices to reflect the new tax realities.
For all taxpayers, the standard deduction rises from $6,350 for single filers ($12,700 for married couples filing jointly (MFJ)) to $12,000 single ($24,000 MFJ), almost doubling. However, the $4,050 personal exemption is repealed entirely, so what was a tax filing threshold of $10,400 ($6,350 + 4,050) for single filers and $20,800 ($12,700 + (2 x 4,050)) for MFJ filers rises by only a little over 15%. The personal exemption for dependents is also repealed, so if a taxpayer has dependents, they may actually see their threshold for paying income tax decrease and their taxable income increase, which would mean paying more in taxes. (An increased Child Tax Credit and a new credit for other non-child dependents will offset some of the loss of the dependent exemption.)
The rise in the standard deduction leads to a higher threshold amount for claiming itemized deductions (on Form 1040 Schedule A). This will simplify filing for many taxpayers, since they will no longer see any benefit from itemizing nor any need to keep track of itemizable expenses; conversely, their taxable income may rise and their taxes along with it. In addition, many itemized deductions are eliminated, such as interest on home equity loans, investment expenses, tax preparation expenses, and unreimbursed employee expenses (we’ll return to this last one later). Others are capped, such as state and local tax (SALT) deductions, which will be limited to $10,000 per year. This will be felt especially in states such as New York, New Jersey, and Connecticut whose state income tax and property tax rates are relatively high.
One provision that does apply for tax year 2017 as well as 2018 is a reduction in the floor for itemized medical expense deductions. This is lowered to 7.5% of adjusted gross income (AGI), from 10% of AGI, for the 2017 and 2018 tax years, which generates a larger tax deduction for taxpayers who itemize. But note the floor returns to 10% of AGI for tax year 2019, so if you expect to itemize and anticipate having significant medical expenses in the near future, it may be wise to incur them this year, if possible.
Adjustments to gross income (“above the line” deductions) are also affected. For example, moving expenses are no longer deductible (except for some active-duty military servicemembers). However, some adjustments considered for elimination, such as student loan interest and educator expenses, remain in effect.
Some freelancers who file as sole proprietors on Form 1040 Schedule C, or who have companies structured as “pass-through entities” – this means partnerships, limited liability corporations (LLCs), or Subchapter S corporations, which do not pay income tax as organizations, but rather pass through profits to their owners to be reported on the owners’ individual tax returns – will be able, starting in tax year 2018, to deduct 20% of their net business income, as reflected on Schedule C (for sole proprietors or single-member LLCs) or on Schedule K-1 (for partners, LLC members, or S Corp owners), from their AGI as a “below-the-line” deduction to calculate taxable income. This is a temporary provision that is designed to expire after 2025, it is subject to phase-out above a certain income level, and it does not change liability for self-employment tax. The phase-out applies particularly for high earners (above $157,000 for single and $315,000 for MFJ taxpayers) in certain “personal service” professions, including physicians, attorneys, accountants, consultants, and businesses whose “principal asset … is the reputation or skill” of the owner. It is unclear at this time if linguists need to be concerned whether this last designation could apply to them; however, 70 percent of all eligible taxpayers regardless of profession fall below this income threshold, so the issue is relevant to a relatively small group. This provision should prove helpful for most self-employed linguists, be they sole proprietors or incorporated as LLCs/S Corps. Some freelancers may find it advantageous to undertake the process of forming an LLC or S Corp, however, it is not necessary to change sole-proprietor status to take advantage of the 20% deduction. LLC or S Corp formation takes time and can often be costly, so linguists considering doing so should weigh their options with care and consult with an attorney, accountant, or other qualified professional advisor.
Some proposed changes to tax law that were widely discussed did not end up in the final law as passed. I have already mentioned the student loan interest and educator expense adjustments; additionally, graduate student tuition waivers, which are now not considered taxable income, but were in danger of being reclassified as taxable, remain non-taxable. Employer-paid continuing education tuition expenses were also under consideration to be reclassified as taxable income, but remain non-taxable if they meet the criteria set in the tax code.
One change that was widely rumored during the process of passing the bill was based in a misunderstanding. It is not and never was the case that “business expense deductions” were up for elimination; what were considered for elimination, and ultimately eliminated, were unreimbursed employee business expenses. If you are an employee, and your employer does not reimburse you for certain expenses you incur as part of performing your work duties, these will no longer be deductible as itemized deductions (on Form 1040 Schedule A). If you own your own business, expenses you incur in the course of business remain deductible (on Form 1040 Schedule C) as in previous years, with one exception: The “meals and entertainment” deduction is changing. Business entertainment expenses, which were deductible up to 50% of total expenses in a given year, will no longer be deductible. Business meals remain deductible up to 50% of the total as before. Also of note is that the home office deduction is unchanged. The criteria that a taxpayer must meet to claim the home office deduction remain quite strict, so claim it with caution!
There are many other changes in the new law that are beyond the scope of this article. If you think some of these provisions apply to you, I strongly recommend you consult with a qualified tax professional, such as a certified public accountant (CPA), attorney, or enrolled agent. We always ask our clients to trust professionals for their translation needs, and accounting and tax issues are similarly an area where trusted professionals are worth their weight in gold. The IRS has online guidance for choosing a reputable tax professional at https://www.irs.gov/tax-professionals/choosing-a-tax-professional, along with a link to a directory of tax professionals with IRS-recognized credentials. (I happen to be on this list.)
I wish you the best of luck in navigating through this challenging business environment!
Christine Quiñones is a freelance Spanish-English translator from Brooklyn, NY with a degree in accounting from New York University. She will be serving as Treasurer for the NYCT beginning January 2018.
