Merry Taxes and Happy New Year!

Posted by JasonBlumeron Dec 26, 2017 in

The Tax Cuts and Jobs Act was passed on December 20th, and the President is signing the bill into law today. We want to give you some perspective about it and how it will change your tax bill in 2018. It’s a big bill and, depending on who you ask, this may or may not be a ‘tax cut’ for the right people. But we’ll avoid the politics and stick with the topics that will help you know what to do next. Read on, and Merry Taxes!

There are a number of tax changes related to families and kids, but we’ll focus more on the strategies you need to know as business owners. But before we get to the strategies for business, let me list a few key changes for individuals:

  • Starting with the current 15% tax bracket, the tax rates have been lowered for individual taxpayers. As an example, the 25% tax bracket has been lowered from 25% to 22%, and the 28% bracket has been lowered to 24%. This could be a little deceptive because the range of income that is covered by each tax bracket has also changed, meaning more or less income is covered by each tax bracket as compared to current law.
  • The standard deduction for taxpayers that do not itemize has almost been doubled, but the personal exemption for each person you claim as a dependent has been taken away. The doubling of the standard deduction makes up for the personal exemption you lost for each person. Doesn’t sound like a big deal unless you have a few kiddos. After a few kiddos, having a personal exemption for each kid would be better for you than doubling the standard deduction. Thinking about having that third kid just for the tax break? It won’t help now (unless you wait until 2025 when these individual changes sunset, a.k.a. go back to the way they were). This change may also help those who didn’t have enough to itemize their taxes, but still had more deductions than the previous standard deduction. For tax year 2018, the standard deductions are now $12,000 for single taxpayers (was $6,350 in 2017), and $24,000 for joint filers (was $12,700 in 2017).
  • The child tax credit goes from $1,000 per child to $2,000 per child, as long as you can claim them on your return (called dependents). Sweet! Kids are expensive. And the income phaseout of when you lose this benefit has increased, which means higher income earners may get the child tax credit now. There are some calculations for refundable portions of the child tax credit (refundable meaning the child tax credit of $2,000 can bring your taxable income all the way down to $0, and you can receive a portion of the credit back as a tax refund), but that’s more complicated than I’ll put in this list.
  • Itemized deductions have been affected. There used to be a phaseout of the deduction in 2017, meaning if your income was over $261,500 (for single taxpayers) and $313,800 (for joint filers), then you would begin to lose your deductions. But that was 2017. That’s gone now and you will get your full itemized deduction. BUT...
  • Now that there is no phaseout for itemized deductions, the bill starts to target and limit some of the particular itemized deductions. Up first is the State and Local income taxes. These are now capped at $10,000 (but if you own a rental property, that real estate tax will not be capped). If you itemized before, you could deduct your full state and local income taxes. Now they will be capped, hurting those taxpayers in higher tax states (like California and New York). And you can’t deduct your 2018 state income taxes early in 2017 just to get the deduction (but you can do that for your property taxes). Similarly, mortgage interest can now only be deducted on new home purchases up to $750,000 in debt (it used to be $1,000,000 of mortgage debt). And you can now no longer deduct mortgage interest on a second home, or home equity loans.
  • There used to be a penalty on individuals who did not have health insurance. That has been repealed, and now you won’t be penalized if you don’t have health insurance.

Now to speak to our small business clients. The bill permanently lowers the corporate tax rate from 35% to 21%. But that is for corporate entities. Many small businesses (and all of our clients) are paying taxes on their business income at the individual tax level because their business income is pass-through income. So if you hear that corporate tax rates have been cut, this does not apply to sole proprietorships, LLCs, partnerships or S corporation owners.

Pass-Through Business Owners

Though the corporate tax cuts mentioned above are permanent, the tax cuts on pass-through entities only last through 2026. For pass-through business owners, there will be new 20% deduction against the business income flowing into your individual tax return. Further, after the deduction, your pass-through income will only be taxed at the highest rate of 29.6%, instead of the highest ordinary tax brackets pass-through income is normally taxed at. Though this benefit phases out at $157,500 (for single taxpayers) and $315,000 (for joint taxpayers) of personal total income, this law will spell a huge tax savings for business owners with pass-through businesses.

New Business Expensing

Small businesses can deduct up to $1,000,000 in Section 179 deductions (it used to be $500,000). Section 179 allows for small businesses to write off the complete purchase of equipment. This ability to expense the cost of new investments in your business starts to go away in 2023 (lowering by 20% per year).

Small Business Tax Strategies

Tax strategists like us typically adhere to the basic strategies of ‘accelerate expenses, defer income.’ That means that we typically try to bring future expenses into this current year to get a larger write-off, while also pushing income to future years if we can. But that may be changed this year end since tax rates are lower in the future than they are this year. Ultimately, it may not make a huge difference unless you are playing with large amounts of money. And you may want to consider what your personal life looks like next year, too, as you decide which year you want your income taxed. If things change significantly for you individually from this year to next, it may allow you to push income to future years to realize the tax benefits of being in different situations from year to year (for example, if you were getting a divorce and would file as Single next year, or would be having a new kid next year).

Still confused? We serve small business owners, and help them wade through this stuff. Email us at [email protected] to see if we can help you navigate these rules and how they may affect you.

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