Tax Reform Overview
There’s been lots of buzz about the “Tax Cuts and Jobs Act” that was signed into law December 2017. Effective from 2018 through 2025, this bill introduces substantial tax changes for 2018. The overhaul will impact both individual and corporate taxes and will require many taxpayers to re-evaluate their tax structure.
For individuals, the big changes are:
· Reduces individual tax rates by 2%-4% for each bracket. See full chart here: https://www.investopedia.com/news/trumps-tax-reform-what-can-be-done/
· Doubles the standard deduction from $12.7K to $24K for married filing jointly
- The standard deduction is used when taxpayers are not benefited by itemizing deductions such as interest on a mortgage. The increase in the standard deduction will pull more tax payers into the standard deduction
· Eliminates the $4,150 personal exemption which was always used in addition to any deductions
· Eliminates tax penalty for individual not covered under a qualified healthcare plan
· $10K limit for itemizers on their property taxes and state income taxes paid
For Corporations and Pass-Through entities, the notable changes are:
· Flat corporate tax rate of 21% (ranged from 25%-39% prior)
· Qualified pass-through entities (entities that pass income and deductions to the tax return of owner) receive a 20% deduction on Qualified Business Income (limitations for professional service entities)
· Cash basis accounting allowed for businesses with gross sales up to $25 million (previously $5 million)
· Use of carryforward Net Operating Losses capped at 90% of taxable income
What does this mean for most taxpayers? Since the largest tax rate decrease was given to corporations and pass-through entities, we would expect to see a big change as to how employees decide to be paid by their employers. That is, being a traditional W-2 employee won’t be attractive from a tax standpoint when an employee can create an LLC and be paid as a contractor. This will allow employees to either be taxed as a corporation at a 21% tax rate or become a pass-through entity, allowing 20% of their income to be deducted.
In summary, taxpayers have a lot of planning to consider this year with the implementation of all these changes. Depending on the situation, carrying prior tax strategies into 2018 are not likely to have the same advantages. Please reach out to New Era CFO at (989)-390-6760 or email at firstname.lastname@example.org to schedule a free consultation.