Patience is prudent
The Tax Cuts and Jobs Act (TCJA) of 2017, passed at year end, has been called the most extensive tax legislation in more than 30 years. It’s certainly far reaching, covering individual income taxes, business income taxes, and estate taxes. The new law has many tax saving opportunities as well as possible pitfalls.
Trying to grasp everything in the TCJA can be overwhelming. Therefore, it’s best not to panic; don’t rush into tax motivated actions just because of gossip or opinions you hear. There’s no need to act rashly this early in the year.
That said, it is important to understand what’s in the TCJA and what it might mean to you. Consider this issue of CPA Client Bulletin as a place to start. You’ll find explanations of some key portions of the law as well as tax planning ideas.
One issue is not sufficient to cover the new law, so we’ll keep you posted throughout the year as uncertainties are addressed and new strategies emerge. Of course, if you have questions about the TCJA and possible planning tactics, please call our office for personalized response.
Know your true tax rate
It has been widely reported that the TCJA lowers federal income tax rates for many people. The highest tax rate, for example, has fallen from 39.6% to 37%. Many people who are in lower brackets also stand to benefit.
Example 1: Alice Young had $100,000 of taxable income in 2017. As a single filer, Alice was in the 28% tax bracket. If Alice has that same $100,000 in taxable income in 2018, she will be in a 24% bracket. Indeed, Alice could add as much as $57,500 in taxable income this year and maintain her lower 24% tax rate.
Not for everyone
However, there are some quirks in the new rates. Some people actually face higher rates.
Example 2: Brad Walker had $220,000 of taxable income in 2017, which put him in a 33% tax bracket. With the same income in 2018, Brad will face 35% tax rate.
In addition, the federal tax rates such as 24% or 35% are just one factor in determining the true rate you’ll pay by adding taxable income, or the true amount you’ll save with a tax deduction. Many people owe state or even local income tax, which might be fully or partially deductible on a federal tax return or not deductible all. Various other provisions of the tax code will also impact your marginal tax rate-the percent you’ll owe or save by adding or reducing taxable income.
Knowing your true tax rate can help you make knowledge financial decisions, some of which are explained elsewhere in this issue. By starting with your 2017 tax return and incorporating your expectations as well as your plans for 2018, our office can help you determine the value of tax related actions.