Andrew Bailey, CPA, ABV | Supervisor | Published by Crow Shields Bailey
As many are well aware, United States tax law changed when the Tax Cuts and Jobs Act (TCJA) was signed into law this past December. The change was advertised to save taxpayers money and reduce the burden of filing taxes. However, if you do not do any planning before next April, you might end up with an unexpected tax bill and resulting headache. Now that we are nearly halfway through 2018, here are some helpful action items to consider before the end of the year.
Review Your Paystub
If you earn a paycheck, you may have noticed a little pay bump back in February. As a result of the TCJA, most individual tax brackets decreased. Guidelines were issued to help implement employers with tax withholdings under this new law; however, employers are relying on withholding forms (W-4s) that were created under the old tax law. These forms ask employees to select a number of allowances to determine the amount of tax to withhold. The allowances were intended to reflect exemptions claimed on the taxpayer’s individual tax return.
The new tax law repealed personal exemptions completely. They did expand the child and dependent tax credit and standard deduction, but many Americans could still have a tax withhold shortfall due to the old W-4 forms. Our recommendation is to review your most recent paystub and see if you are having enough tax withheld. If not, contact your HR representative and update your withholdings now instead of having a surprise tax bill down the road.
Understand Itemized Deductions
Under the TCJA, the standard deduction has increased from $6,350 to $12,000 for single taxpayers and $12,700 to $24,000 for married filing joint taxpayers. That change alone will limit the number of taxpayers who itemize their deductions.
The most widely discussed change to itemized deductions is the new cap on the state and local tax deduction (SALT). Under the TCJA, the SALT deduction cannot exceed a total of $10,000. If you’re a taxpayer in a high-income tax state or an area with high property taxes (or both), your SALT deduction may not look like it has in years past.
Another big change for our clients is the change to home equity line of credit (HELOC) interest. Under the TCJA, HELOC interest is no longer deductible. In addition, only the interest on $750,000 of mortgage debt is deductible for new mortgages taken out after December 14, 2017.
Some other changes worth pointing out are the repeal of miscellaneous itemized deductions and the charitable contribution change for seating rights. Under the TCJA, you will no longer be allowed a deduction for “miscellaneous itemized deductions.” These items were your unreimbursed employee expenses, tax preparation fees, investment advisor fees, etc. The TCJA also is not going to allow a charitable deduction for “seating rights.” This means you are no longer allowed a charitable contribution deduction for the donation you make to your favorite university in exchange for the rights to purchase season football tickets.
Leverage Small Business Advantage
So far, you might not see how the TCJA is beneficial outside of the lower individual tax brackets. However, if you are a business owner, now is a great time to review your tax and business plan. As the media has been reporting, large corporations are giving bonuses as a result of the TCJA. This is due in part to the corporate tax rate being lowered to 21%. However, a larger number of family-owned businesses are pass-through entities. This means the profits pass through to the owners and the tax is paid at the individual level.
Pass-through business owners need to familiarize themselves with the new pass-through deduction. Pass-through businesses will now get a 20% deduction on the pass-through income since the corporate tax rate is now 21%. However, not every business will qualify, and some planning will need to be done to see if there is anything you can do to ensure you receive the full 20% deduction. This is probably the most complicated part of the TCJA, so we will save those details for another post, but go ahead and read a few credible articles on this topic to understand the basics.
Another huge change for business owners is the expanded bonus depreciation and Section 179 expensing law. Many purchases of tangible personal property such as equipment, computers, and even some capital improvements are now 100% deductible in the year they are put in service. In addition, the TCJA is allowing businesses with average annual gross receipts of $25 million or less to use simplified accounting methods. Overall, the TCJA is encouraging business and capital investment in the United States.
These are just three areas of change under the TCJA. Much more has changed under the law, and we are working to guide our CSB clients through this transition. If any of these topics affect your personal situation or if you have question about the TCJA, give us a call. We would love to help you determine how the TCJA impacts you and your financial future.