Tax Cuts and Jobs Act of 2017: Big Changes in Place!
2018 Tax Outlook: Big Changes in Place!
If you blinked, you might have missed it! Late last year, Washington passed the Tax Cuts and Jobs Act of 2017 -- the biggest tax overhaul in 31 years. It was so long ago that Ronald Reagan was still in the White House. Matlock, Alf, and L.A. Law were television hits. And Madonna was still a doe-eyed ingenue.
The new law's main focus is on cutting corporate tax rates. Our old maximum corporate rate of 35% really was one of the highest in the world, and Congress thought it made us less competitive abroad. Their obvious answer was to lower rates to attract business and investment here. Of course, not all businesses operate as taxable corporations -- over 90% of American businesses are "pass-throughs," meaning their owners report their business income on their personal returns. So, Congress wanted to cut taxes on those businesses as well. Finally, they wanted to cut rates for individual taxpayers. They understood it would be politically unpalatable to cut rates for the Fortune 500 without doing something for the people who work for them.
Here's the challenge, though -- cutting all those taxes costs money. So, Congress had to come up with "payfors" to make up for most (but not all) of that lost revenue. (The 2018 budget resolution let them grow the deficit by $1.5 trillion over the next 10 years.) They did it in two ways. First, they tightened or eliminated many of the deductions we've come to take for granted over the years: personal exemptions, state and local taxes, mortgage interest, and the like. And second, they scheduled most of the new benefits for individuals to expire at the end of 2025.
Here is a summary of some of the changes you should understand for 2018 and beyond, with some ideas for making the most of these opportunities, and suggestions where we need to sit down for more in-depth planning. We look forward to discussing these changes and helping you with the appropriate response! Call us at 480-696-0375. You can also send us an email at firstname.lastname@example.org
Big Changes to Tax Basics and Brackets!
The most obvious changes will apply to all taxpayers, no matter how they earn their income.
First, the law essentially doubles standard deductions, from $6,350 to $12,000 for singles and from $12,700 to $24,000 for joint filers. This should cut the number of taxpayers who itemize from the current one-third to about just 10%.
Second, the new law eliminates the old personal exemption, which was scheduled to rise to $4,100 for 2018. This will obviously blunt much of the benefit of the higher standard deductions, especially for families with children.
The law limits many popular itemized deductions, too. Write-offs for state and local income/sales/property taxes are limited to just $10,000 per year, regardless of how much you actually pay. Mortgage interest deductions are limited to $750,000 of principal, down from $1 million. Home equity interest is no longer deductible, and most miscellaneous itemized deductions are gone, too.
Finally, the new law keeps the seven-bracket rate structure, but lowers those rates in almost every bracket, with the top rate dropping from 39.6% to 37%.
Big New Deduction for Proprietorship Income
Although sole proprietorships offer few specific tax breaks, the Tax Cuts and Jobs Act of 2017 makes them potentially more valuable by characterizing proprietorship income as "qualified business income" -- and offering a deduction of up to 20% of that amount. However, careful planning may be required to take advantage of this opportunity, especially if it comes from "specified personal services" or your taxable income is over $157,500 (singles) or $315,000 (joint filers).
Big New Opportunities -- And Careful Planning Required -- for "S"Corporations
S corporations have always been valuable vehicles for minimizing employment tax, shifting income to lower-bracket family members, and avoiding audit risk. The Tax Cuts and Jobs Act of 2017 makes them potentially more valuable by characterizing S corporation income (but not W2 wages or investment income) as "qualified business income" -- and offering a deduction of up to 20% of that amount. However, careful planning may be required to take advantage of this opportunity, especially if it comes from "specified personal services" or your taxable income is over $157,500 (singles) or $315,000 (joint filers).
Tremendous Opportunities for "C" Corporation
The Tax Cuts and Jobs Act made the most significant changes to C corporation tax rules in a generation, primarily by slashing rates to a flat 21%. It also eliminates the old "personal service corporation" rules that taxed those businesses at a flat 35% rate. These changes open up all sorts of new income-shifting opportunities.
New Opportunities for Family Income-Shifting
The Tax Cuts and Jobs Act of 2017 nearly doubles the standard deduction for single taxpayers to $12,000. This creates even more opportunity to shift tax-free earned income to your children by hiring them to work for your business.
New Opportunities for Family Management Companies
Adding a C corporation to your overall structure can create savings through income-shifting and deductible benefits. The Tax Cuts and Jobs Act made the most significant changes to C corporation tax rules in a generation, primarily by slashing rates to a flat 21%. These changes create even more opportunities to shift income off your personal return or lower the effective rate on income you route through a side entity. However, it will take careful planning to make the most of these changes.
New Opportunities for Management Companies
Establishing a corporation to "manage" your property lets you convert income from rents and capital gains into ordinary income, which you can use as a basis for deductible benefit programs such as retirement contributions and medical expense reimbursements. The Tax Cuts and Jobs Act made the most significant changes to C corporation tax rules in a generation, primarily by slashing rates to a flat 21%. This change opens up substantial new opportunities to shift income out of your properties.
Any tax advice contained in the body of this presentation was not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions.
Visit the Services area of our site to learn more about the many accounting and tax services available to individuals and businesses.
Visit the Contact Us page for information regarding how to reach us via telephone, fax, e-mail or mail.
Feel free to contact the office anytime. We're here to help.