The new tax bill is hundreds of pages long and while the internet is already full of “What this will do to you” scenarios, it will take some time to completely digest all the changes. Will the new law help or hurt your individual and business tax situation? It all depends on how much you make, the types of income you have (i.e. investment, business, rents, wages, etc.), the types and amounts of deductions you take, and a host of other factors. One thing is certain: despite what the politicians may say, the IRS is not busily printing postcard-size tax forms!
The 2017 tax act was billed as a sweeping overhaul of our tax system. To be sure, there are hundreds of changes. But at its core the new law does what most tax legislation has done over the past years. It tinkers with tax rates, takes exemptions and deductions away, it repeals some current tax law, and adds some new rules that will keep CPAs fully employed for years to come.
The law also repeals the penalty tax for those who do not have health insurance – the end of the individual mandate under the Affordable Care Act. How this will play out in terms of future insurance rates, insurance products, and the federal deficit is known only to those who believe they can predict the future.
With virtually no time left in 2017 to plan what should you do?
For individual taxpayers, it is clear Congress has the intent to reduce the number of tax returns claiming itemized deductions by increasing the standard deduction. Tax rates are going down and the Alternative Minimum Tax (AMT), while not repealed, should impact fewer taxpayers, but with the loss of the personal exemption, a new $10,000 cap on the deduction for state and local income, sales, and property taxes, limits on mortgage interest, the end of home equity interest deductions, and the abolishment of miscellaneous itemized deductions, the actual tax benefit of the rate reduction must be determined on an individual basis.
For most taxpayers, it is prudent to be sure to pay your property taxes and any state tax that will be due for 2017 before the end of the year. No, you can’t prepay and take a deduction for taxes that are due for 2018 and beyond. The new law shuts down that opportunity. It would also be wise to make all charitable contributions by December 31, 2017 before the restrictions on itemized deductions go into effect.
The primary focus of the new law is on tax rate reduction for businesses – down to 21 percent for corporations. The new bill also provides a new deduction for those that operate as sole proprietors, partnerships, and S corporations. While fraught with complexity, generally the new deduction offers a 20 percent of business income deduction for these small businesses. Some in the professional services (attorneys, doctors, and of course accountants!!) will not be able to use this new deduction if their income exceeds $157,500 for singles or $315,000 for married couples. Engineer and architects must have better lobbyists since they can take the deduction regardless of income.
The new laws will once again alter the depreciation and asset expensing rules, only allow like-kind exchanges on real property, eliminate the domestic productions activities deduction, repeal the deduction for 50 percent of entertainment expenses, and change many other tax laws for businesses. Consequently, the traditional planning concepts of deferring revenue until 2018 and accelerating expenses into 2017, and maximizing your retirement plan contributions are still your best options for tax savings.
Estate and Gift Tax:
The new tax law increases the lifetime exemption from gift and estate tax to $10,000,000 indexed for inflation. For 2018 the total exclusion is expected to be approximately $11.2 million. So only a few folks will be impacted by these taxes.
There is more! Much more! Stay tuned for projections, analysis, praise, gripes, and commentary in the future.
Peter Robbins is a partner in the Eagle accounting firm Robbins & Armstrong, LLP.