New Tax Cuts and Jobs Act (TCJA) Legislation
On December 22, 2017, the American people experienced the largest overhaul of the Internal Revenue Code since 1986 as The Tax Cuts and Jobs Act (TCJA) of 2017 was signed into law by President Donald Trump. Most of the new tax provisions took effect January 1, 2018, and affects your 2018 tax return that you’ll file in 2019. Many Americans are left wondering how the Tax Cuts and Jobs Act will affect their individual pocketbooks. Here’s a summary of some changes that may affect your tax return.
Will You End Up Paying More Taxes or Less as a Result of Tax Reform?
Depending on a taxpayers individual situation, some may see a big change on their 2018 tax return, and some may see little change. Each taxpayer’s situation needs to be taken on a case by case evaluation. Under the new tax legislation, it is possible for 2 individuals who earn the same income to have different tax liabilities.
The Tax Cuts and Jobs Act is Made Up of Several Tax Law Changes
Some of the changes are:
- Personal exemptions are eliminated for all
- Standard deductions are basically doubled
- Itemized deduction schedule A has a higher threshold for medical expenses
- Some deductions have been eliminated or capped
- Tax rates have been slightly reduced at each level
- The child tax credit has been doubled and a new $500.00 credit for other dependents added
- A new deduction for trade and business income has been added
The Winners and Losers
Generally speaking, these general categories define the winners and the losers resulting from the changes to the IRS Tax Code.
Winners include small business owners, families with children under age 17, and taxpayers that just barely were able to itemize deductions.
Losers include employees with substantial out-of-pocket business expenses, and taxpayers that live in high income taxed states or with high property taxes.
TAX REFORM WINNERS
Small Business Owners
Small business owners are winners because of the new “qualified business income” deduction that represents an additional deduction of 20% of net profit from taxable income. This deduction will apply in full unless total taxable income exceeds $315,000. married filing joint or $157,500. for everyone else. If exceeding these thresholds, the 20% deduction may be reduced or eliminated depending on a taxpayer’s individual situation.
Knowing that this can represent a large tax savings, opens the door to three possible planning scenarios:
- Enjoy the larger refund
- Pay in less estimated tax and invest the savings in the business
- Offset the savings by withdrawing funds from an IRA or converting funds from an IRA to a ROTH. (NOTE: A conversion to a ROTH under the new tax law, cannot be undone as before.)
Option 3 is a good choice for those that wish to transfer as much of their estate tax-free to their beneficiaries as possible.
Families With Children Under Age 17
Families with children under age 17, are winners because the child tax credit has been doubled from $1000.00 per child under age 17, to $2000.00 per child.
The personal exemption amounts have been eliminated for everyone, but this is more than compensated for by the doubling of this credit which goes directly against the amount of tax.
In addition, if the tax is less than the amount of this credit, up to $1400.00, per child of unused child tax credit is potentially refundable. This can significantly increase the amount of refund received by the taxpayer.
Taxpayers Barely Over the Old Standard Deduction Amount
Taxpayers that were able to itemize deductions, but just barely went over the old standard deduction amount, will be winners because now they can quit keeping up with receipts, mortgage statements, etc, and simply enjoy the doubled standard deduction.
Seniors Over 65
Seniors over 65 still get an additional deduction of $1600.00 single ($1300.00 per taxpayer if married filing joint).
Personal Exemption VS Old Standard Deduction
Personal exemptions are eliminated, but the doubling of the standard deduction more than offsets that elimination.
TAX REFORM LOSERS
Employees With Substantial Out-Of-Pocket Business Expenses
Employees that have substantial out-of-pocket business expenses are one of the losers under the new tax law and will probably want to renegotiate their employment status with their employer.
Business expenses which include mileage, travel, tools, uniforms, etc are no longer deductible as an itemized deduction starting with the 2018 tax year. This can represent a much larger amount of tax unless the taxpayer had a high income and was previously subject to the AMT (Alternative Minimum Tax) rules.
Business expenses were therefore already essentially eliminated under the rules of AMT.
There are two possibilities to get around this eliminated deduction which presently will be in place for five years:
- Become an independent contractor and file taxes as a self employed individual. All business expenses would then be deducted directly from gross income on a schedule C and the net profit carried to the personal 1040. The potential pitfall here, however, is the loss of employee benefits such as health insurance and 401K options.
- Stay an employee, but set up an accountable plan with the employer such that expenses are substantiated to the employer and reimbursed. The employer may wish to lower the salary amount to offset the reimbursements which the employer can now deduct.
Tax Payers Who Live in a High Tax State
Another loser under the Tax Cuts & Jobs Act, are those taxpayers that live in a state with high state income taxes and/or high real estate property taxes.
These taxes are still allowed as a deduction when itemizing, but are now capped at a total deduction of $10,000. Previously, there was no limit on the amount of taxes that could be deducted. The much reduced deduction will significantly increase the amount of tax due. Those taxpayers living where state income taxes are low or non-existent and property taxes are relatively low, will be unaffected by the $10,000 cap.
If you looking for trusted income tax professionals to prepare your taxes this year, we, here at Carolina Business Services, would be honored to partner with you.
We are available to answer your specific tax questions. We have the most up-to-date information and advice relating to the new TCJA and how it will impact your current tax situation. Give us a call or send an email. We look forward to serving you with your 2018 income tax preparation to be filed in 2019.
Give us a call at 828-287-9595 or send an email for an free in-depth consultation concerning your specific tax preparation needs. We are happy to answer your questions.
NOTE: The information contained in this article is a general overview the Tax Cuts and Jobs Act (TCJA) of 2017 and cannot be treated as tax advice in any way that is applicable to your specific tax situation. The Tax Cuts and Jobs Act includes many additional changes that are not summarized in this article that could potentially affect your 2018 income tax return.