Tax reform

A new tax law? What do I need to know?

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Phillip R. McCollum, Jr., CPA, JD

The New Year is starting off with the largest reform in our tax system in more than three decades. Overall, every taxpayer will be impacted by the law changes. Whether you’re a business owner, a married couple with children or you are retired, you will feel the effects of the changes to some degree. Even though you may hear some legislators call the changes “tax simplification,” in many ways, it’s made the tax law more complex. Here are the major items that could impact you starting in 2018.

Reduction of C Corporation tax rates

This is the centerpiece tax reduction item of the new law. The tax rate for C Corporations has dropped to a flat 21% from a maximum 35%. This change is going to lead to many conversations with business owners. Should I be a C Corp? Or, should I convert from an S Corp to a C Corp? will be common questions from clients. This provision highlights entity structuring discussions with clients that we haven’t had in quite a while.

20% deduction from income for pass-through business income

This law change has generated plenty of attention in the media and is a welcome tax break, but it comes with exceptions and complications. It is not a blanket 20% reduction for pass-through income (S Corporations, Partnerships and Sole Proprietorships). The exceptions and complications involve looking at the amount of investment in the business, the wages paid by the business and the capital investment in the business. Additionally, the law change will not apply to certain types of businesses. The additional computations and analysis involved with this deduction will require increased reliance upon your tax advisors to maximize its benefits.

Reduction of individual income tax rates + tax brackets

While there are still seven tax brackets with the new law, six of those are at lower rates. Here are the new rates and the new income levels for married taxpayers filing joint returns.

Old rateTaxable income bracketNew rateTaxable income bracket
10%$0 to $18,65010%$0 to $19,050
15%$18,651 to $75,90012%$19,051 to $77,400
25%$75,901 to $153,10022%$77,401 to $165,000
28%$153,101 to $233,35024%$165,001 to $315,000
33%$233,351 to $416,70032%$315,001 to $400,000
35%$416,701 to $470,70035%$400,001 to $600,000
39.6%$470,701 +37%$600,001 +

Personal and dependent exemptions end, standard deduction increase

The new law eliminates the personal and dependent exemptions. For example, a married couple with two children used to take four exemptions on their tax return. Now, those exemptions are gone. The elimination of these exemptions is offset to some degree by the increase in the standard deduction which doubled from $6,350 to $12,000 for individual filers and $12,700 to $24,000 for married filing joint taxpayers. Also, if you itemized your deductions in past years, you might not do that anymore because the higher standard deduction exceeds the amount of itemized deductions that were traditionally taken.

Deduction limits

There is a new limit on how much you can deduct for state and local taxes as an itemized deduction. Before, there was no ceiling; now the amount is capped at $10,000. The $10,000 cap includes state individual income, sales and property taxes. If you pay $20,000 in these taxes, you will only be able to deduct $10,000 of the total paid. So, while we have new overall lower tax rates and higher taxable income brackets in most cases, we’re losing this valuable deduction.

There’s also a reduced limit on the home mortgage interest deduction for new mortgages. Before the new law, you could deduct all the interest on a mortgage with a principal balance up to $1 million. That mortgage principal threshold has been lowered to $750,000 for new mortgages. The new law also eliminated the deductibility of interest on a home equity loan.

Better understanding of the new tax law

The new tax law is complex and it will take some time for professionals and commentators to review the many revisions to the law to determine further impact to businesses and individuals. Additionally, the IRS will issue regulations for the many provisions of the new tax law that will be written and released in the coming year.

As we further understand the law, we can be a valuable resource to you as we navigate through this change. Subscribe to our Tax Insights blog for weekly updates over the next several months on the new provisions and the impact you’ll see. As always, if you have questions, contact Henry+Horne for help.

Phillip R. McCollum, Jr., CPA, JD, Partner, specializes in tax planning, consulting and compliance work for privately held businesses and their owners. He can be reached at (480) 839-4900 of PhilMc@hhcpa.com.