Whether or not you approve of its macroeconomic effects, the GOP’s federal tax reform package has passed, and will affect every employee and business in the nation – some more than others.
To help navigate the changes, the Cumberland Valley Business Journal turns to Matthew Wildasin and Gregory Hamm of Boyer & Ritter, one of the region’s foremost accounting firms.
Will this change how I do my taxes in April?
Probably not, Hamm explains. Remember that, in April 2018, you’ll be reconciling your taxes for the 2017 calendar year. Most of the federal tax bill taxes effect for the 2018 calendar year, meaning they won’t impact your balance until you do your April 2019 taxes.
“There are really only two provisions that are fully retroactive to 2017 and could change your taxes this coming April,” Hamm said.
The first of these is the extension of so-called “bonus depreciation.” Companies are normally able to deduct from their taxable income a certain percentage of their capital, as these physical assets depreciate.
Since the recession, depreciation deduction schedules have been accelerated to encourage capital investment. The new tax bill takes this even further, allowing businesses to instantly deduct 100 percent of new capital from their tax liability through 2022. This bonus depreciation will be phased back by 20 percent each year after, until it sunsets in 2027.
For small business owners, Hamm and Wildsain suggest not waiting to book any capital expenses, such as computers, machinery, etc. – use them on your 2017 returns to help compensate for overall rates being higher in 2017, as most of the tax cuts won’t hit until the 2018 calendar year.
The other provision that can be applied retroactively is the deduction of medical expenses. Previously, uncovered medical costs above 10 percent of a filer’s income were deductible – that number will go down to 7.5 percent for 2017, retroactively, and 2018.
Will this change what I see on my paycheck?
The IRS has issued guidance on new withholding schedules, Hamm noted, that employers are to put in place by Feb. 15.
This means that your first paycheck after Feb. 15 may have a different amount withheld, depending on what your total 2018 tax liability is projected to be. For most people, this will probably put a few extra dollars in each paycheck, mostly due to the increase of the standard deduction.
Individuals will have a $12,000 standard deduction for 2018, as opposed to the $6,350 standard deduction and $4,050 personal exemption – for a single worker who doesn’t itemize, this means an extra $1,600 of your salary will be untaxed.
However, this will impact workers with dependent children, as the personal exemption can no longer be claimed for each child – those with multiple children could see their untaxed income drop, raising their effective rates.
However, the child tax credit will be doubling from $1,000 to $2,000 per child under age 17, and up to $1,400 of this credit will be refundable, meaning that low-income parents could get up to $1,400 per child back from the government each year.
Additionally, higher earners can now claim the credit – single parents who make up to $200,000 can claim the credit, and married couples up to $400,000. Previously, the child credit was limited to $75,000 for single parents and $110,000 for couples.
The changes will likely not make a huge net difference for most families, but will serve to simplify the way withholdings are calculated, and reduce the number of people who itemize their deductions instead of taking the standard deduction.
“We’re expecting to see a lot of people going off the rolls of those who itemize, which is what provides the simplification element,” Wildasin said.
A long list of small items that were previously deductible have been stricken, and heavy itemizers should check to see what they can still deduct. This includes alimony, moving expenses, interest on mortgage debt over $750,000, and other items.
What if I itemize my state and local taxes?
The viability of itemizing your state and local tax payments (SALT) as being deductible from your total taxable income will decrease under the new tax plan, which will cap SALT deductibles at $10,000.
Individuals with very high SALT payments may need to stack away more tax payments during the 2018 year, as not all of these SALT costs will be deducible when it’s time to file in April 2019.
What if I own a stake in a business?
That depends significantly on how that business is organized, which is one of the most critical and controversial elements of the GOP tax plan.
The plan reduces the corporate tax rate from 35 to 21 percent. But this applies to companies that are registered as actual “C-corporations,” such as companies whose stock is publicly traded.
Corporations held by individuals or partnerships are often set up as pass-through entities, meaning they don’t report corporate income, but rather report their profits as individual persona l income to their stakeholders.
“If we’re talking about a C-corporation, they would see their tax rate dropping to 21 percent, so therefore the estimates they would be paying in throughout 2018 would not be as much, unless they’re projecting a lot more profitability,” Wildasin said.
“On the pass-through entities, which is a lot of what you see here in Central PA, you’re going to see S-corporations, partnerships, LLCs, and others where the income passes though and is rported on the 1040 forms o fthe individual shareholders,” Wildasin continued.
Under the GOP tax plan, 20 percent of pass-through income would be tax-deductible, and the rest taxed at the personal income rate.
For wealthy individuals who hold stakes in multiple pass through entitles – such as President Trump himself, who receives income from over 500 pass-throughs – this will drastically lower their tax rate on passive investment income.
Under the GOP plan, the top personal tax bracket for income over $500,000 is being lowered form 39.6 percent currently to 37 percent for 2018. With a 20 percent deduction on top the 37 percent rate, this provides and effective tax rate of 29.6 percent for top earners.