In 2017, Congress and President Trump passed sweeping tax reform that changes how businesses and individuals will plan for federal and state taxes in the years to come.
Advisors, especially those who help with tax planning, need to be aware of the changes, said Sheryl Rowling, head of rebalancing solutions for Chicago-based Morningstar.
“The tax world as we know it has been significantly changed,” said Rowling. “The decisions that [advisors] make on their clients behalf, and the recommendations that they offer, will have to be based on a whole new foundation.”
The reform cuts corporate and individual tax rates, with reductions in business taxes made permanent, while individual tax cuts are slated to expire in 2025.
Businesses will pay a federal tax rate of 21 percent, down from a maximum of 35 percent before reform, while pass-through entities like S corporations and limited liability companies may or may not see their rates reduced. Individauls will pay a maximum tax rate of 37 percent, down from a maximum rate of 39.6 percent, while the standard deduction will double to $12,000 for singles and $24,000 for married couples.
At the same time, individuals will lose many of their exemptions and deductions, including the personal exemption and many other itemized deductions.
Rowling offered five tips for advisors helping their clients tackle the new tax laws:
Watch your clients’ withholdings.
While clients may get a larger paycheck due to the new withholding tables, they should be wary that they may owe more come April 2019.
“I can recall many years ago there was a similar situation where wage earners got more in their paychecks each month because withholding rates were reduced,” said Rowling. “The new tax laws create a relaxed attitude. When it comes time to do taxes, many people find out that they didn’t have enough withholding and ended up owing money.”