Tax Law Change Write Up
We’ve written up the new tax law changes! This may seem a bit difficult to wrap around entirely, so please don’t hesitate to call our office to schedule a further break down.
It’s December 7th and we still don’t know exactly what will change in the current tax proposals. On December 2nd, the Senate voted to pass an amended version of the tax reform bill. It passed by 51 to 49, not exactly a landslide.
The Senate Tax reform bill offers a 23% deduction for certain pass-through business income and allows up to a $10,000 deduction for state and local property taxes. Medical expenses that exceed 7.5% of adjusted gross income is deductible. The bill also increases the tax for mandatory repatriation toll tax to 14.49% for cash and equivalents and to 7.49% for illiquid assets. Modifications are made to depreciation deductions. Sadly, it keeps the AMT (Alternative minimum tax) for both individuals and corporations. Repeals the domestic production deduction. Income tax rates will be reduced for almost all citizens (but deductions may be disallowed – which may make more of your income taxable – thereby increasing your taxes). Confused? You are not alone.
Both the house and senate bill include a permanent reduction in the corporate tax rate from 35% to 20%. I get asked a lot why this matter. Let me simply explain: If a company wants to open a new location and is scouring locations to build it and one in the US must pay a 35% income tax rate and one in Canada which pays 15% – well – where would you build the plant? ***
In the US we also have double taxation. Let me explain this concept using general calculations: ABC Corporation has a profit of $1,000,000 and they pay the IRS $350,000. They now pay their stock owners (investors, institutions and our 401(k) accounts) a dividend of $650,000. We now file our individual tax returns listing the dividend money received and pay a minimum of 15% tax or $97,500. So, on earnings of $1,000,000 the IRS gets $447,500 – ouch!
What about me?
What should you do? Good question. Since income tax rates are decreasing – it makes sense to defer as much income as you can until 2018. Do you have a bonus, selling a stock, or other types of controllable income? If you are self-employed, can you afford to delay invoicing your clients? If so, do it. Push all income possible until 2018.
Stock sales are a little troubling in the new legislation. Currently you can choose which stocks you are selling. For instance, if you bought 100 shares of ABC stock in 2010 for $1,000 and then bought 50 shares of ABC stock in 2012 for $2,000 and now want to sell the stock you could choose which shares you are selling. In one version of the new legislation, your must use FIFO (First in, first out). That could increase your taxable income. If you have this situation, you may want to sell some stock in 2017.
Accelerate all deductions possible to 2017. This includes increasing your payments for your state income tax withholding, state tax estimates, paying real estate taxes due in January 2018 in 2017, making your charitable contributions in 2017 instead of 2018 (although one version of the tax plan allows all charitable deductions in 2018) and more. Consider using a credit card to pay deductible expenses in 2017 (even though you pay the bill in 2018). Look at your miscellaneous deductions, those that are on Schedule A that must exceed 2% of your AGI to deduct, to see if you could pay those fees in 2017.
Another way to reduce your taxable income, is to donate appreciated stock as a charitable contribution
This is the time to consider maximizing your 401(k) contributions, SEP or IRA. If you are 70 ½, make sure that you have taken all your RMDs (required minimum distributions from IRAs, 401(k) plans or other employer-sponsored retirement plans. The penalties are nasty.
I own business, what do I do?
Place into service new computers, software, office furniture, machinery and equipment before December 31, 2017 to qualify for the 50% bonus depreciation. Take advantage of the safe harbor exclusions where you can expense purchases. Accelerate paying expenses, whether by check or by credit card, in 2017 (those that you would pay in 2018 normally). Adjust your invoicing schedule to 2018. A word to the wise, make sure that you can afford to make these changes and still function.
Everyone, we are available to assist you in planning for these changes. Just give us a call or send us an e-mail.
***Canada has a corporate rate of 38%, which becomes 28% after their federal tax abatement. There is a further general tax reduction of 13%, so the net tax rate is 15%. Small businesses net 10.5%.