The deadline to file 2018 tax returns (Monday, April 15) may still be more than nine months away, but it's not to early for wealthy clients to start planning, especially since the most sweeping tax changes in a generation will take effect this year under the Tax Cuts and Jobs Act.
Join your wealthy client’s CPA and attorney as a team now to plan for the law’s possible impact, said Amber Goering, CPA with Goering and Granatino, Overland Park, Kan. “Clarifying regulations were published for 16 years after the last major tax reform bill, passed in 1986,” Goering added. “There are many outstanding [TCJA] questions that will take years for Congress and the IRS to address.”
“Calculate the impact of changes on your expected 2018 income to see if your tax withholding or estimated payments are appropriate,” said David McDaniel, CPA and partner with Sikich LLP in Indianapolis. “Withholding tables were changed in February for the new law and most wage earners saw a drop in tax withholding. So the benefit of reduced taxes will be realized during the year in higher take-home pay rather than a larger refund next spring.”
McDaniel also offered these changes from TCJA that influence tax strategy moving forward:
• The slight lowering of individual marginal rates at most income levels, with the top rate reduced from 39.6 percent to 37 percent.
• The standard deduction is now $24,000 for joint returns, up from $13,000, and $12,000 for single returns, up from $6,500.
• Elimination of the personal exemption, which was $4,050 for each dependent and was subject to an income level phase out for high-income taxpayers.
• The itemized deduction for state and local taxes limited to $10,000 for all taxpayers -- “a significant tax deduction for wealthy taxpayers.”
In addition, mortgage interest is deductible on mortgages made after Dec. 16, 2017, up to $750,000, down from $1 million. Reform also eliminated miscellaneous itemized deductions, employee business expenses, investment expenses and account management fees and tax-preparation costs. The impact of the alternative minimum tax was reduced, and alimony is no longer a tax break.
Another wrinkle: The qualified business income deduction, which is calculated entity-by-entity, can be limited on the individual level due to income phase outs. “If you own or are a partner or shareholder in several businesses, analyze savings opportunities now to maximize the deduction.” Goering said. “If your industry and income make the deduction subject to limitations, consider setting up a defined benefit plan. This could help reduce your taxable income.”