Tax planning is a great reason to reach out to your tax professional in most years. The goal of a tax planning project is to evaluate current year expected income and deductions and provide planning estimates to the taxpayer so that the amount of tax owed can be planned for and not be a surprise on March 15 or April 15. Of course, the planning process also involves looking for opportunities under the tax law to reduce the amount of tax owed and defer or accelerate taxable income into a year where the rates are most favorable.
The Tax Cuts and Jobs Act passed by Congress in December 2017 made sweeping changes to federal taxation of individuals and businesses. It will be important to work closely with your Davie Kaplan tax advisor to make sure you are aware of the changes that will impact you and your business. Some of the most common changes impacting taxpayers are shown below.
- Income tax rates. Modest reductions were made to individual tax rates while corporations received the biggest rate reduction under the tax law change. A system of graduated tax rates ranging from 15% to 35% was replaced by a flat rate of 21% for tax years starting in 2018 and later. The individual rate change is set to go back to pre-TJIA rates after 2025, while the corporate rate change was made permanent.
- Income tax deductions and exemptions. In exchange for lower individual tax rates, the new tax law suspended personal exemptions of $4,050 for each taxpayer and their dependents. Increases were temporarily put in place for the standard deduction – the deduction for taxpayers who do not elect to itemize their deductions. The standard deduction has doubled in amount: $12,000 for singles (was $6,350) and $24,000 for married couples (was $12,700). As mentioned above these individual changes are temporary and are schedule to return to pre-TJIA limits after 2025.
- New deduction for pass-through businesses. For tax years beginning in 2018 and through 2025, the TJIA created a new deduction for owners of pass-through businesses such as S Corporations, limited liability companies (LLCs), sole proprietorships and partnerships. Generally, the deduction amounts to 20% of qualified business income (QBI). The deduction is subject to limitations when individual taxable income exceeds $157,500 for singles and $315,000 for married filing joint taxpayers. In addition the deduction is not available to certain specified service businesses (e.g. most professional practices – doctor, lawyer, financial advisor) who are impacted by the taxable income limitations. Additional limitations and rules apply.
The TJIA creates the need for most taxpayers to take a look at how the law impacts them. Choice of entity decisions (corporation vs. pass-through) and tax accounting methods should be re-examined under the lens of the TJIA changes.
Taxpayers will experience changes to their tax return in 2018 at a level not seen since the Tax Reform Act of 1986. The highlighted items mentioned above are only a small part of the TJIA overall changes. Davie Kaplan has a team of expert tax advisors available to help you understand the key provisions of the new law that will impact you and your business. Contact us to start a dialogue on how best to maximize the benefits available under the new law while minimizing negative impacts as well.