Congress passed a sweeping tax reform bill in late December 2017, and our economy has taken off in 2018. This tax law is commonly known as the Tax Cuts and Jobs Act, and the law makes significant changes for business owners and individuals. Although political parties may differ on their opinion of the changes, there is no question the new tax law is the biggest tax reform in over three decades. Additionally, there are unprecedented planning opportunities developing for individuals and business owners.
So what really changed with the Tax Cuts and Jobs Act? We’ll look at these changes from an individual perspective AND a business owner perspective in this post.
Changes in Individual Taxation
The income tax brackets for individuals, as well as for couples, are generally lower under the new act. The current tax law changes will stay in place from January 2018 thru December 2025, but there is plenty of discussion about making these cuts permanent in future legislation. We will defer to the actual tax tables for each of the different tax filer types and income levels, but it is fair to assume most taxpayers received a tax cut on their applicable individual tax rate.
A significant change for many individuals will be the increase in the standard deduction and the elimination of personal exemptions. In an effort to make tax filing simpler for many people, the standard deduction nearly doubled with the following changes:
|OLD LAW||NEW LAW|
|Individual Standard Deduction||$6,350||$12,000|
|Married Couple Standard Deduction||$12,700||$24,000|
These deductions are indexed for inflation, so they will increase over time. Many of the personal exemptions have been eliminated, and limitations have also been placed on some of the more common itemized deductions. The net result of these changes for many individuals, and couples, will be many more taxpayers will just use the simpler standard deduction and less will be itemizing deductions.
There will be winners and losers from all these changes, and one of the areas with probably the largest impact will be the new limitation on the deduction for state and local taxes paid. Those taxpayers in high state tax markets, like New York or California, could see less attractive results from these changes versus taxpayers in average state tax markets, like Missouri and Kansas. As always, every individual taxpayer will need to evaluate the impact on their individual taxes.
Another significant change is the doubling of the Estate, Gift and Generation-Skipping Tax (GST) Exemption. These exemptions have been raised for 2018 to approximately $11.2 million per person and $22.4 million for couples. These changes generally eliminate the need for Federal estate tax planning for over 99% of Americans. Some states still have state-level estate tax exemptions at much lower levels, but many Americans’ estate tax planning became much simpler under these higher exemption levels. Additionally, for those interested in gifting to the next generation, these changes open up new opportunities for planning.
There are plenty of additional changes to individual taxation, and too many for this summary article to cover. Other key changes include:
- decreases in the Mortgage Interest Deduction,
- increases in the Child Tax Credit,
- a repeal of the Roth IRA conversion rules,
- the repeal of the Affordable Care Act Individual Mandate, and
- changes to charitable contribution rules.
Changes in Business Owner Taxation
The larger changes in the Tax Cuts and Jobs Act apply to business owners. These changes are having a direct impact on the growth of our economy, and there is no question our hyper growth has been boosted by the positive results of these changes.
One of the bigger changes is the temporary deduction for pass-thru business entities like sole proprietorships, partnerships, S Corporations and Limited Liability Companies (LLCs). Historically, these business owners have paid individual income tax rates on the pass-thru income from these business entities. So, for example, the owners of an LLC would generate business income from the LLC, but this income would generally pass thru to them as individuals and their individual tax rate would apply. Sometimes these tax rates could be as high as 39.6%.
The new tax law provides qualified business owners with a twenty percent (20%) deduction to apply against income from these pass-thru businesses. This deduction is commonly known as the new Qualified Business Income Deduction, and there are plenty of additional details to understand for its application. The impact on these pass-thru business entities can be very significant. WealthCounsel, an organization of wealth planning attorneys and advisors, of which The Bell Law Firm is a member, has prepared a detailed summary of this new qualified business income deduction and it is available at the end of this post for your review.
Another area of significant business taxation change is the taxation of C Corporations. Historically, C Corps have been taxed with rate structures of 15%, 25%, 34% and 35%. Additionally, the Corporate Alternate Minimum Tax (AMT) can apply if it results in higher taxation of the C Corp. The new tax law repeals the Corporate AMT and taxes all corporate income at 21%. These tax law changes do not have a sunset provision at the end of 2025, and they are considered permanent changes to the tax laws for C Corps.
There are additional taxation changes applying to C Corps with dividend-received deductions, capital contributions and other areas. The net result of all these changes is projected to make the C Corporation a much more attractive business entity choice than it has been in the past. Every individual business is different, but many business owners may be considering the idea of converting their business to a C Corporation.
Once again, like the individual taxation rules, there are too many changes to the business taxation rules for a summary article like this one. We highly recommend that all business owners plan a consulting discussion with their CPAs about these changes before the end of the tax year. Many of these changes are just beginning to be fully understood, and the federal regulations are becoming more available.
At The Bell Law Firm we will be glad to review these tax law changes with you, but we want to work with the business owners’ CPAs to fully support the business owners as they move forward. We are strong believers that all business owners need a team of advisors generally comprised of:
- a tax resource (CPA),
- a financial advisor,
- a legal resource, and
- a separate insurance resource (if needed).
Other resources may also be needed depending on the type of business. If you’d like us to be a part of your team, or you need help forming an experienced team of advisors, please give us a call at 913-345-2323.