The newly signed Tax Cuts and Jobs Act overhauls the Internal Revenue Code and provides broad tax relief to workers, families and businesses of all sizes.
Tax rates are lowered for individual and business taxpayers, and various tax deductions and credits are eliminated or reduced. A typical family of four earning $73,000 a year could receive a tax reduction of as much as $2,000. Most of the provisions contained in the tax reform bill apply to tax year 2018 and future years up to Dec. 31, 2025.
There is a bundle of tax law provisions, such as the tuition and fees deduction and mortgage insurance premiums treated as residence interest, that expired at the end of tax year 2016. Congress is expected to extend these measures for tax year 2017.
Implications to your Tax Practice
Tax professionals are subject matter experts and should quickly get up to speed on the legislation and the impact on their individual and small business clients. Although most of the legislation applies to tax year 2018, taxpayers should be made aware of these changes as the calendar turns to 2018.
Tax professionals should consider turning the vital tax law measures into layman’s language and communicating the material to clients and prospects. This can be a service to existing clients and an avenue to grow one’s tax practice by educating prospects. Various methods of communication may include: social media, newsletters, information posted on website, setting up appointments and conducting presentations.
During the course of the tax year 2017 engagement (January – April 2018), practitioners could consider providing tax year 2018 planning services for their clients. Tax professionals will want to look at their clients’ tax situations and determine the impact the tax reform measures have. Consequently, adjustments may need to made to income tax withholding for individual clients and estimates for small business clients, accordingly.
Top Individual and Family Measures
- Individual tax rates lowered to 0%, 10%, 12%, 22%, 24%, 32%, 35% and 37%.
- Personal exemption eliminated and standard deduction increased to $12,000 for individuals and $24,000 for married couples.
- Taxpayers are allowed to deduct 1) property taxes and 2) state and local income taxes (or sales taxes in lieu of income taxes) up to a $10,000 maximum.
- The child tax credit is increased from $1,000 to $2,000 and is refundable up to a $1,400 maximum. The credit begins to phase-out for families earning more than $400,000.
- The mortgage interest deduction is preserved for new mortgages on a first or second home, and the deduction is limited to underlying debt of up to $750,000. The deduction for interest on home equity debt is suspended.
- The individual mandate and associated penalty for not being covered by health insurance under the Affordable Care Act are eliminated permanently beginning in tax year 2019.
- The exemption amounts for the alternative minimum tax are increased to $109,400 for joint filers and $70,300 for single taxpayers.
- The estate and gift tax exemption is doubled from $5 million to $10 million.
Top Small Business Measures
- The corporate tax rate is lowered from 35% to 21% beginning Jan. 1, 2018.
- A 20% tax deduction is allowed for income earned from sole proprietorships, limited liability companies, partnerships and S corporations. The deduction applies to the first $315,000 of income and reduces their effective marginal rate to a 29.6% maximum. Wage income is not eligible for the lower rates on business income.
- Businesses are allowed to write off the full cost of new equipment purchases.
- The Section 179 expensing limit of $500,000 (with $2 million phase-out) is increased to $1 million (with 2.5 million phase-out).
- Luxury automobile depreciation limits increased to $10,000 for the first year, $16,000 for the second year, $9,600 for the third year and $5,760 for the fourth and later years.
- Small businesses can continue to write off interest on loans.
- The corporate alternative minimum tax is eliminated.
- The domestic production activities deduction is repealed for non-corporate taxpayers beginning in 2018 and for C corporations beginning in 2019.
Consider this broad-based tax reform as an opportunity to enhance your standing as your clients’ trusted advisor. You may decide to circulate and educate your clients about the latest tax law changes. You may also look their individual tax situations and crunch the numbers to determine if income tax withholdings and estimates need to be revised for 2018. Please review more detailed explanations of the rules and exceptions of the tax law changes.
For more questions about tax reform, visit the Tax Reform Resource Center by Intuit® ProConnect™.
Editor’s note: This article was originally published in AccountingWeb.