Little in American politics causes as much noise and debate as a plan to change federal taxes. That certainly was true of the federal tax-cut plan that became law late in 2017, known as the Tax Cuts and Jobs Act. After all the proposals and discussions fade, however, tax experts are left to parse out how they will result in changes for taxpayers, both as individuals and business owners. For tax attorneys and accountants in Columbia and elsewhere, that means months afterward poring over the final details.
After the election of President Donald Trump, some kind of tax plan was expected, says Tony Perricelli, an accountant at Scott and Company in Columbia.
The details were a little more mysterious, however, and changeable. Some proposals that at one time seemed likely to be included did not end up in the final measure.
Tax experts had to act quickly to get up to speed on the revisions, even though many of these changes will not be evident to some of their customers until they file their taxes for the year 2018. According to Tony, some of these changes will be profound enough that some individuals and businesses will be rethinking their tax plans as 2018 goes on to adjust to the new environment.
“The Tax Cuts and Jobs Act is a sweeping piece of tax legislation, and I think that a lot of folks are still getting their heads around it,” says Aaron Scheuer, a tax attorney at Haynsworth Sinkler Boyd.
Hoping for Growth
Many economists see the tax package as likely to give the United States economy a modest, but definite, boost in the next few years. In the wake of the plan’s passage, the investment firm Goldman Sachs increased modestly its forecast for U.S. economic growth in both 2018 and 2019.
A survey of economists conducted by The Wall Street Journal found that almost all expected an economic stimulus from the bill’s passage in the short term, but they were almost evenly split on the prospects for long-term growth from the plan.
The plan was considered a boon for many companies, as reflected in a broad rally in stock prices after it was signed into law by President Trump. Some companies also said that the plan’s provisions would allow them to make new investments in the United States or to provide raises or one-time bonus packages to their workers.
Effects on Wage Earners
For many individual taxpayers in the prime of their earning years, one of the major effects of the tax package in 2018 will be the numerous changes to deductions, according to Tony. Those will be among the changes that affect the most taxpayers, starting with the major increase in the standard deduction that everyone receives.
The standard deduction will almost double, with the deduction for individuals rising to $12,000 and for couples filing jointly to $24,000. This will cause many more people to see no point in itemizing their deductions. They will quickly understand after a few calculations that itemizing instead of taking the standard deduction would not make sense for them.
“It probably will simplify things for many people,” Tony says.
The one change that will probably affect the most taxpayers is the change in overall rates and tax brackets. Under the measure, the top tax bracket is ratcheted down to 37 percent from 39.6 percent. This top bracket for those in the category of married filing jointly does not kick in until $600,001, which reflects the overall expansion of the income range of the brackets.
These broader brackets should have the effect of lowering the tax rate for many taxpayers. A couple filing jointly that has $75,000 in taxable income has a top rate of just 12 percent on most of it, down from 15 percent the year before. Applying the other major changes to the law, this couple with no children is likely to save more than $1,000 as the law kicks in for 2018, according to an online estimate from the Tax Foundation.
In all, the changes to the tax brackets are substantial but not a massive change to what came before, Tony says. “That will definitely help out.”
While the standard deduction rises, numerous other individual deductions are trimmed or vanish completely under the plan. The personal and dependent exemption deductions are eliminated under the plan, a change which could add considerably to the taxable income level for larger families. This change could be offset for some by an increase in maximum child tax credits from $1,000 to $2,000 for each child, Tony says. That tax credit cannot be taken for kids older than 17, unlike the dependent exemption that had applied even for college-aged children, he adds.
Under old rules, mortgage interest on loans with up to a $1,000,000 balance was deductible. The new law drops that mortgage balance limit to $750,000 for newly originated mortgages. This change could impact buyers of more valuable properties, according to Tony.
For those who itemize business expenses that are not reimbursed by the employer, a substantial change has been made. Fees such as professional organization memberships or travel costs for professional development are no longer are tax-deductible. For those who have been paying these costs themselves and taking deductions, this can be a major change. “That could have a big impact on your agreement with your employer,” Tony says.
Also no longer deductible: membership in college-affiliated booster groups such as the Gamecock Club or IPTAY at Clemson. Many have been paying for these memberships as part of their packages for football and other sports tickets, but the tax deduction connected to the memberships is gone.
Another deduction has been more strictly limited. Interest from a home-equity loan no longer is deductible unless the money is directly put into improving the residence. Previously, interest paid on home equity loans up to $100,000 could be deducted even if the money was being used to pay down debts, cover college costs, buy a new car, or any other purpose.
Effect on Those with Investment Income
A couple of changes could be important to those with significant income from real estate they own or invest in. In fact, another lowered deduction applies to property taxes paid. There is now a cap on how much property tax is deductible, lumping together taxes from residential and vacation property, auto property taxes, and others. The deduction for those taxes has been capped at $10,000 per year. “This is going to have a major impact,” Tony says, adding that this $10,000 limit also includes state and local income taxes.
Those who are retired face fewer major changes, he maintains. The tax package made no modifications to the part of the tax code that would most affect retirees, such as the capital gains tax or taxation of investment dividends. “It really won’t be a ton of changes for retirees,” Tony says, “at least in the specific area of how dividends and capital gains are taxed, but retirees are still affected by all the other provisions such as changes to deductions, tax rates, exemptions, etc.”
Effects on Small Businesses and Their Owners
The tax legislation came through to help businesses in a variety of ways. “There are many pro-business provisions in the act,” says Aaron. The most notable of the numerous changes to business taxes is a cut in the corporate tax rate. The top tax rate paid by many businesses, especially bigger and publicly held ones, has been chopped from 35 percent to 21 percent. Unlike many of the changes to individual taxes, which are set for now to lapse in 2025, this change to corporate tax rates is permanent unless later legislation changes it.
This rate change is so substantial that some smaller and mid-sized businesses will be considering whether to adjust their tax status to take advantage of it. “We are reigniting several of those conversations,” Tony says.
Another change will help individual taxpayers who receive business income from S corporations, partnerships, or sole proprietorships. These taxpayers will be eligible for a 20 percent deduction on their individual returns when they meet certain criteria for this income.
“This deduction is available to just about any pass-through business if the owner’s taxable income is less than $157,500 if filing single or $315,000 if married filing joint. Above those income limits, other restrictions apply — most notably that professional service firms such as medical practices, law firms, accounting firms, and financial consultants are not allowed to take the new deduction,” says Tony. Another of the many business tax changes involves depreciation on purchases of equipment, a likely source of added economic stimulus. In short, companies will be able to use options in the law to take depreciation more quickly than before on purchases. The end result: timelier tax benefits.
According to Aaron, companies are offered a tax credit for compensation paid to employees who are on paid family or medical leave. The tax credit can range up to 25 percent of the compensation paid to the employee if the employee is receiving more than half of his or her pay while on leave.
These are only a few of the many changes that the new law has brought to the federal tax code. For many taxpayers, meeting with their own tax attorney or certified public accountant will be the best way to understand how the sweeping changes of the Tax Cuts and Jobs Act affect them or their business.