Tax season isn’t everyone’s favorite time of the year, but don’t let a new reform overwhelm you. President Trump’s Tax Reform Act was passed on December 22nd, 2017.
The Act is designed to cut income tax rates, it doubles the Standard Deduction, and eliminates many personal exemptions. The individual changes became effective January 1st, 2018, and will expire at the end of 2025.
There are lots of other changes within the bill, but whether you are a small business owner, filing individually or joint, or a CPA, there are many tools and resources to help to ensure that you know just how you/your client’s taxes will be affected.
If you file as an individual, or for your family, here are some changes that you can expect for the 2018 year. Your personal deduction will be eliminated, and the Standard deduction is doubled, changing from the previous $6,000 to $12,000 for individuals, and $12,000 to $24,000 for married couples.
This could create a drop in housing prices, since it is estimated that most people will use the Standard Deduction, rather than the Mortgage Interest Deduction. The Mortgage Income Deduction allows those who own their home to reduce their taxable income by using the interest from the loan they used to buy their house. Could be a great time to buy!
Individuals are also allowed to deduct up to $10,000 of property taxes and state and local income taxes. For families claiming children dependents, the reform has double the Child Tax Credit, from $1,000 to $2,000 for those households making under $400,000 per year. Your take home business income could also see some changes this year. This bill rewrote tax brackets, changing the tax rates as well as income ranges. Check out this table from The Balance indicating new income tax brackets.
Small Business Filing
If you are a small business, changes apply to you too. Unlike individual filing changes that end in 2025, business’s changes remain permanent. Corporate tax rate lowered substantially from 35% to 21%. This is the most substantial change for businesses in addition to those who qualify for the 20% deductions. If you are a pass-through entity, (sole proprietors, partnerships, and LLC’s) you most likely qualify for a 20% tax deduction.
A “Pass-through” company means that the company itself is exempt from income tax, and the owner itself is taxed on income. You can write off full cost for new equipment and purchases, as well as all interest on loans. However, the bill also changed some of the expenses you may have been deducting previously. If you are a business such as an accountant, lawyer, musician, or consultant, you are probably excluded from these tax breaks because of the lack of necessary employees or because of higher earnings. If your business operates internationally, it is important to know about the new “territorial tax structure” that is part of the reform. This structure eliminates taxes on money made overseas. This is very beneficial to companies who do lots foreign business, but were being taxed by the U.S.
If you are a business, you probably hire a professional to make sure your taxes are prepared properly and that you are receiving the most benefit you can each year. Intuit ProConnect is a helpful resource center for tax reform news and other tools for tax professionals and their clients. They have various articles and information regarding tax reform and gives you the ability to compare various tax scenarios for federal tax rates over the next years. They are all up to date with current tax laws and changes, so you are always getting accurate and current information.
Although the new tax reform is the first significant reform in the last 30 years, and there is so much information to process, there are tons of amazing tools and services to make sure you are taken care of when it comes time to prepare your taxes. Whether individually, joint, or as a business owner, it’s easier than ever to seek out resources and information to see how new legislature affects you.