Editor’s note: South Florida Legal Guide asked Philip J. Shechter, CPA. partner at Cherry Bekaert, to discuss the impact of the 2017 Tax Cuts and Jobs Act on individual and business taxpayers. Here are his comments.
Q. Who should pay the most attention to the changes?
A. While the new tax code affects everyone filing a 2018 federal income tax return, if you are used to itemizing your deductions, paying or receiving alimony or deducting unreimbursed employee business expenses, then you need to take a look at the new rules very closely.
Q. Is there an overall theme for the changes?
A. Yes. The act, in general, makes it more difficult to itemize your deductions, and encourages more taxpayers to take the standard deduction, which was increased to $12,000 (single) and $24,000 (married filing jointly). That benefit was counterbalanced, in part, by the elimination of the personal exemption of $4,150 per person.
Q. What about individual tax rates?
A. Most individuals will see a 2 to 3 percent reduction in their tax rates. However, the income brackets have changed and so have the limits on itemized deductions and personal exemptions, so you may not know how large a benefit you are getting until you prepare your 2018 tax return.
Q. Will the changes affect mortgage interest deductions?
A. Yes. The mortgage interest deduction has been capped on loans made after December 16, 2017. You can only deduct interest on loans up to $750,000, so if you have a larger mortgage you lose a prior benefit. The act also eliminated the deduction on both existing and new home equity lines of credit (HELOC). So, you may want to refinance an existing HELOC into a permanent home mortgage to benefit from the interest deduction.
Q. What about state and local taxes?
A. The new act limits the total deduction for state and local income, real estate and sales taxes at $10,000 per year. While Florida has no state income tax, this will be a concern for “snowbirds” who have jobs or properties in the Northeast and other states with relatively high state and local taxes.
Q. How will alimony payments be affected?
A. The act repeals the alimony tax deduction effective January 1, 2019, as well as the corresponding inclusion in gross income for recipients. The government expects to generate billions of dollars in tax savings from this provision over the next six years. So, if you are involved in a divorce where the tax benefits of alimony payments are significant, you should try to obtain a final judgment before the end of 2018.
Q. Any other significant provisions for individuals?
A. The act raised the child care credit from $1,000 to $2,000 for taxpayers who fall within qualifying incomes. It also allows individuals saving for a child’s education to use their Section 529 plan for private schools as well as colleges and universities.
Q. What types of businesses will benefit from the new tax code?
A. The act lowered tax rates for regular “C” corporations from 35 to 21 percent starting in 2018. That can be a huge savings for major companies like Apple, which plans to reinvest its tax savings in its operations.
Q. Will there be any relief for smaller businesses?
A. Yes. If you own a business structured as a pass-through entity, such as an “S” corporation, partnership and limited liability corporation (LLC) or are a sole proprietor, you may be able to exclude 20 percent of that income on your 2018 personal tax return.
Q. Do all pass-through entities benefit?
A. No. There are income limits on the 20 percent deduction and limitations for owners of businesses that provide personal services, such as doctors, lawyers, accountants, web designers and writers. If your income is more than $157,500 on an individual return and $315,000 on a joint return, you may not qualify. Talk with your accountant early in the year because the changes to the taxation of pass-through income are some of the most complex provisions in the new law.
Q. Is there a benefit to converting from a “S” to a “C” corporation this year to take advantage of the new code?
A. In most cases, the answer will be no. A “C” corporation still pays federal income taxes and state corporate taxes, and shareholders still pay taxes on the dividends they receive from the business.
Q. What about deductions for employees?
A. Until now, employees have been able to deduct unreimbursed business expenses on their individual returns. But that deduction was eliminated by the new act. So, companies and employees may need to renegotiate their reimbursement policies and practices. In some cases, employees may wish to consider the possibility of becoming an independent contractor, receiving income on a 1099 form rather than as wages, because they could then deduct their business-related expenses.
Q. Are there other major impacts on businesses?
A. Yes. The act eliminates the prior 50 percent deduction for business-related expenses related to entertainment expenses. That could have a negative effect on the “skybox market,” as companies may be less inclined to host expensive receptions, parties and other events for their customers and employees.
However, 50 percent of food and beverage expenses can still generally be deducted through 2025
Q. Any other thoughts?
A. The new tax code is more than 1,000 pages long, and these are only some of the highlights. You should talk with a tax professional and discuss how these changes will affect your 2018 personal, family and business returns.