A Blizzard of Tax Changes are Headed Your Way

A Blizzard of Tax Changes are Headed Your Way

by Brendon Pack, December 2018

As most of us have heard by now, the new tax law that passed last December, the Tax Cuts and Jobs Act (TCJA), made substantial changes to the U.S. tax code for both individuals and businesses. Well, whether we did anything or not or we're prepared for it or not, the fact is, when the calendar changes to January 1, the result of those changes will be set. So before you have your last eggnog, while you're in the midst of shopping and before the celebrations kick-off, you may want to carve out a little time with a tax advisor to understand how the new tax law is going to affect you personally.

Otherwise, you may receive more (or less!) than you bargained for in your stocking and/or under the tree come the first of the year.

Here are some key high (and low) lights of what's yet to come:

Charitable Deductions No Longer So Charitable

Charitable deductions may also be impacted as the new tax law raised the standard deduction amounts from $6,350 to $12,000 for single filers (or married filing separately), and from $12,700 to $24,000 for married couples filing jointly. When you consider your charitable deductions, the limit on state and local tax (SALT) deductions (now capped at $10,000), and other allowable deductions, you will most likely be better off taking a standard deduction than itemizing.

The new tax law also increased the limit for contributions to charitable organizations from 50 percent of adjusted gross income to 60 percent. One way to still take advantage of charitable deductions is to bunch them in certain years and then itemize only in those years. That way, both you and the charitable organizations can benefit.

No Re-Gifting for Retirement Accounts

It used to be that a taxpayer could convert a traditional IRA to a Roth IRA and then wait until October 15 of the following year to see if the conversion was beneficial. If the Roth IRA didn't pan out, you could “re-characterize" the Roth contribution as a contribution to a traditional IRA, while not paying any tax on the conversion.

The new tax law eliminated the conversion option. So, while Roth conversions may still be your best bet, you and your tax accountant will need to analyze your financial situation to determine which retirement account option is best for you.

Lighting a Candle for Education

Education plans, commonly called Section 529 plans, provide a way for taxpayers to save for higher education costs. The earnings in such an account are tax-free. More than 30 states also allow a deduction or credit applicable to state income taxes for taxpayers who contribute to these accounts.

Now, the new tax law allows taxpayers to use up to $10,000 each year in these plans for elementary and high school costs at public, private, or religious institutions. This option offers taxpayers an additional planning tool they didn't have before.

Underneath the Mistletoe

Taxpayers in high-tax states, such as California, New York and New Jersey, have traditionally been able to create trusts in states that don't tax trust income as a way to eliminate their state income tax exposure. These are called “Incomplete Gift, Non-Grantor (ING) Trusts."

With the SALT caps now in place, taxpayers in these states may find that creating an ING trust can save them even more tax dollars than previously. Be aware, though, that INGs have specific rules and must be carefully structured.

Incorporating May Be a Gift that Keeps On Giving

For businesses, the new tax law drastically reduced corporate income taxes to 21 percent, a whopping 40 percent cut. At the same time, the new tax law provided a 20 percent deduction on pass-through income, which brought the effective tax rate on such income down to 29.6 percent. Pass-through income typically is reported by sole proprietors, LLCs, partnerships, and S corps.

Depending on your business, it may be advantageous for you to change the structure of your business from, for example, an S corp. or LLC to a C corp. Bear in mind, however, that owners of C corps. still pay a second level of tax when income is distributed or stock is sold. So the tax savings could easily be wiped out unless there are other mitigating circumstances.

They're Making a List and Checking It Twice

In June 2018, the U.S. Supreme Court ruled on South Dakota v. Wayfair, deciding that states may require remote sellers that meet a certain threshold to collect sales tax, even if they don't have a physical presence in that state. It's become known as the “Wayfair Tax," and it's an important change for all types of sellers of goods or services in locations throughout the U.S.

Some states have already put in place laws to collect sales tax from newly qualifying businesses. Make sure that, if you do business in those states, you are collecting adequate sales tax. Otherwise, you may find yourself with a big bill come tax time. Also, you will want to make sure your technology, accounting systems, and personnel are all up to speed with effectively collecting and remitting sales tax in states where you need to do so.

As you've seen, the Tax Cuts and Jobs Act provides a number of tantalizing opportunities while at the same time exposing you to unforeseen pitfalls. When it comes to your individual tax situation for either you or your business, speaking with a knowledgeable tax accountant before the end of the year can reap rich rewards come the New Year.

Learn how the Tax Cuts & Jobs Act can save you thousands on your taxes by scheduling a consultation with a Small Business Tax Specialist from 1-800Accountant today.