A day doesn’t go by that I don’t get a call or email from a client asking what changed with the “tax reform” legislation late last month, and how it affects them.
The Tax Cut & Jobs Act (Public Law 115-97) made radical changes to the US Tax Code. The significance will vary from person to person depending on a number of individual circumstances. As professionals we do not take any political position regarding the changes; rather, our job is to ensure tax returns are properly prepared in accordance with the law and that our clients receive the greatest benefit possible under the law.
Although the act is now law, the IRS as not yet issued any regulations, rules or guidance on it and we expect it will be a few months until that happens. It is a large and complex piece of legislation that will require the IRS to work with Congress to ensure that the intent is properly interpreted in rules and regulations.
Here is a summary of some of the most impacted areas:
- Tax rates changed, and the brackets (income levels) at which those rates are effective.
- There is significant difference in the treatment and taxability of income from different types of tax entities (LLC’s, partnerships, S Corporations) reported
- d on a personal tax return
- The standard deduction has doubled
- Certain income and expenses will be treated differently: medical expenses; mortgage interest; state and local taxes (including real estate and income taxes
- Changes to tax credits, including for children
Changes to personal tax returns are effective 1/1/2018 and are temporary (they expire in 2025 at which time the rates and rules revert back notwithstanding interim legislation). Changes to business tax rates are permanent.
Tax planning this year will be very important, especially for those that operate businesses. We look forward to assisting you.
A special message to individual taxpayers. There has been much discussion about whether or not to prepay your 2018 property taxes due next May & November and the estimated tax payment typically due 1/15/2018 on or before 12/31/2017. These taxes are commonly referred to as SALT (state and local taxes). The correct answer is, it depends. The new tax laws recently enacted specifically address this matter and generally disallow the deduction in tax year 2017 for state and local taxes not due until 2018. There are a [very] few exceptions to this last minute addition and Indiana residents do not meet any of the exceptions. Thus, if the SALT is prepaid in 12/2017, they are not deductible on the 2017 tax return. They can be deducted under the lower thresholds on the 2018 tax return (filed in 2019).
Will deductions be limited? One of the elements of the Trump tax plan is the limitation of itemized deductions. Those are the the items that are used to reduce income. The most common ones are mortgage interest, property taxes and charitable donations. At the present time the deductions are limited only if the taxpayers income is very high. Under the plan on proposed, itemized deductions will be limited to $100,00 for individuals and $200,000 for joint filers.
Welcome, clients and friends! Given all the uncertainty about taxes, I’m using this to communicate, as often as facts can be separated from fiction, information that you may find helpful in your planning. As the last Presidential campaign focused a great deal on tax reform and President Trump campaigned on that issue, here is what we know based on one of the tax policy changes proposed on his official website:
The personal exemption will be eliminated. Currently, it is $4,050 per person, and is expected to be no longer available. Large families could be affected most since parents depend on the exemptions to reduce their tax liability. If your filing status is Head of Household (unmarried with dependents) and have two children, the current income exemption (standard deduction plus dependent exemption) is $21,450. Under the Trump plan it will lower to $15,000 making $6,450 more of your income subject to tax*. The reason I use this example is that the Head of Household filing status would be eliminated under the Trump plan, putting a heavier burden on taxpayers that fall into this category.
* Information provided by the Tax Policy Center, a non-partisan, non-profit organization that analyzes tax policy for current and long-term effect.