By Bruce Bechhold, CPA, Walthall Rea
Jan. 1, 2018, not only brings a new year, it brings a new federal Tax Code. The new Tax Cuts and Jobs Act makes sweeping changes to the nation’s tax laws. Many of these changes take effect January 1. Everyone should review their tax strategies for the new law. The changes are huge. However, many changes are temporary, especially for individuals.
Workers will see the impact of the new law on their paychecks. The Tax Cuts and Jobs Act sets forth seven individual tax rates: 10, 12, 22, 24, 32, 35, and 37 percent (previously 10, 15, 25, 28, 33, 35, and 39.6 percent). Since the tax rates have changed, so must federal income tax withholding. Updated 2018 withholding tables are now available. Taxpayers could see paycheck changes by February.
The IRS also is expected to revise Form W-4 as the new law repeals the deduction for personal exemptions after 2017.
Choice of entity is a hot topic under this new law. Business owners need to immediately start thinking about how they want to structure their business in 2018 and beyond. For corporations, the TCJA permanently lowers the corporate tax rate to 21 percent effective Jan. 1, 2018. The act also changes the tax treatment of popular pass-through businesses such as partnerships, S corps, etc. Very broadly – and the rules here are complex – the TCJA allows deductions for qualified business income of pass-throughs up to a certain percentage, which is scheduled to expire after 2025.
Business owners need to reevaluate their choice of entity. The corporate form may be more attractive for some business owners and the pass-through form may be for others. Adding complexity to the mix is the new law’s rules for certain businesses, such as law firms, and other professions.
Individuals who itemized deductions in past years may find that they may no longer benefit from this law. The TCJA temporarily increases the standard deduction (up to $24,000 for married couples filing a joint return and $12,000 for single individuals). The new law also places limits on the deduction for state and local taxes. Individuals may deduct state and local income, sales and property taxes up to $10,000. Gone are the days of an unlimited deduction for state and local taxes. This change is effective for 2018 and is scheduled to expire after 2025. Other popular deductions also are changed, including the medical expense deduction and the moving expense deduction.
Although the new law repeals the deduction for personal exemptions, it does enhance the child tax credit. The child tax credit increases from $1,000 to $2,000. The refundable portion also increases. Also created is a $500 credit for non-child dependents. These enhancements are scheduled to expire after 2025.
The act does not repeal the alternative minimum tax for individuals. Early on, AMT repeal seemed almost certain. However, Congress needed to keep the AMT because it raises significant revenues. The new law does increase the AMT exemption amounts.
The tax rates for capital gains and dividends have not changed nor has the FATCA reporting and disclosure requirements.
The new law also does not repeal the Affordable Care Act’s taxes, net investment income tax and the additional Medicare tax. The ACA’s shared responsibility payment for employers is not repealed, but the individual shared responsibility requirement is.
Keep in mind that this is just an overview and there are more changes than the ones we covered. This law leaves a lot of the details to the Treasury Department and the IRS to flesh-out. Be patient. Guidance from the IRS may take some time.
Visit our website www.reacpa.com for more information and TCJA resources or call us at 216-573-2330.