2018 Tax Changes

If you are the owner for a plumbing business that has done well through the past ten months, it is the time of year when you begin to realize the downside of financial success is on the horizon—a greater tax bill.  But there may be some good news for you in the Tax Cuts and Jobs Act of 2017.

While there were adjustments to the tax rates applied to different income levels, that isn’t the biggest news, especially if you own what is known as a “passthrough” organization, which simply means an organization whose federal income tax is paid by the owner at the owner’s personal income tax rate.  While you should seek specific guidance from your CPA or tax professional, here is a summary of the main changes that will impact your 2018 federal income tax return:

  • Most taxpayers will find their personal income tax rate is lower by a few percentage points.
  • Standard Deductions have been increased to $12,000 for single filers, $24,000 for married filing joint taxpayers, and $18,000 for a head of household.
  • Itemized Deductions are now limited to $10,000 in property taxes and mortgage interest on $750,000 of debt.
  • Personal Exemptions were eliminated entirely, offsetting the increased Standard Deductions described above.
  • The individual insurance mandate of the Affordable Care Act was repealed, eliminating the penalty assessed against anyone not purchasing health insurance.
  • The so-called Marriage Penalty was eliminated for all but the highest tax bracket payors, meaning an unmarried couple making the same as a married couple will pay the same income tax once again.
  • Most of the publicity about the tax update surrounded reduction of the corporate tax rate to 21%. However, most privately-owned businesses are not taxed via this method since “passthrough” organizations such as S Corps, Partnerships and LLCs have their profits taxed as personal income on the tax returns of their owners.
  • The big benefit for owners of most private businesses comes in the form of a 20% tax deduction against Qualified Business Income (including salary of an S Corp owner). This essentially means only 80% of their company’s profitability is taxable although it is taxed at their higher personal tax rate.

Because of the partisan gridlock in Washington, D.C., the tax bill was passed under a tactic that would only allow these reductions to be temporary, so they will all expire in 2025 unless subsequently made permanent by a larger congressional majority.  In the meantime, remember there is nothing unethical about making legal decisions that will intentionally lower your tax bill—That’s called effective tax planning.

It is estimated that over 28 million taxpayers will be better off taking the newly expanded standard deduction instead of itemizing deductions.  Because of the various simplifications, the IRS estimates the time required to complete a tax return will decrease by up to 7%, lowering compliance costs accordingly.

The Tax Foundation’s evaluation concludes that “These changes will simplify tax filing for tens of millions of taxpayers who will no longer have to itemize deductions, and instead find it more advantageous to take the expanded standard deduction.  A simpler tax filing process translates to millions fewer hours wasted by households complying with the individual income tax, which will translate into real cost savings.”

[This article is not tax advice.  Please consult your tax advisor for specifics.]