Now that the tax reform bill has passed and people have had a chance to read it, here is a quick look at how it will affect you and how to adjust your tax planning with the new scheme.
Although there are a lot of benefits in this bill for businesses and corporations, they tend to be across-the-board cuts and specific giveaways to particular businesses. Only two things really stand out from a planning perspective – the reduced penalty on repatriating overseas profits and the increased standard deduction for pass-through entities. The first affects only the biggest corporations. Most businesses do not have hoards of overseas cash to bring home.
As for the pass-through entities (partnerships, LLC’s and S Corporations), the increased deduction is across-the-board. It may make a difference for those businessmen that both draw a salary and profits from their business and they should speak to a tax professional about how this change affects them, as there are specific provisions in the bill to avoid recharacterizing income to take advantage of the change.
Your personal taxes are where the biggest changes will land. If you took the standard deduction in 2017, all the news is good – you’ll be paying less taxes overall. If you itemized, the news is not so good.
In the past, everybody had two options on their taxes – either take the “standard deduction” to reduce your income by a set amount to represent the various exempted expenses from your day-to-day life or itemize – list your specific exempted expenses. As a tax professional, we always compared the possible itemized expenses to the standard deduction to see which one made the most sense to use. The new tax bill reduces the amount of exempted expenses while also raising the standard deduction.
If you itemized your deductions (that would be on Schedule A of your 1040), and it was not that much larger than the standard deduction, you will now have the benefit of the larger standard deduction. Fewer receipts to keep track of. But if you had significant Schedule A deductions, you will very likely see an increase in your taxable income as your deductions are reduced, perhaps down to the standard deduction amount.
A few people were able to take advantage of the changes to move certain expenses into 2017 to take advantage of the old rules. However, most people were not in a good position to do that. Moving forward, plan on fewer tax advantages to loans. In particular, mortgage interest, home equity lines of credit and student loans will provide less tax value, mainly because they will no longer eclipse the standard deduction. Recalculate your plans for long-term financing to account for this.