The first full year of the Tax Cuts and Jobs Act should mean lower taxes for virtually everyone – from individuals and families to small and large businesses. But there are still a number of minefields for taxpayers, who may not have clarity until after the 2019 season, tax experts said.
The largest tax overhaul in more than a generation has involved complex rule-making and regulations, with some taxpayers still determining how they will be affected and how to best adjust their habits even as they prepare their returns for 2018.
John R. Steffee, a partner in the Wormleysburg office of accounting firm Simon Lever, said he is advising people to be careful this year.
“Take your time. Make sure you have everything right,” Steffee said. “Really check, and then double check and then check again before you put that return in the mail or send it electronically.”
For example, some taxpayers might be in for an unwelcome surprise come April because they didn’t withhold enough cash each pay period, several accountants noted.
“Every individual is probably going to pay less income tax,” said Joseph A. Pancerella, managing director of Pancerella & Associates LLC, an accounting firm with offices in Reading and Exton. “But they still might owe because their withholding went down.”
There also may be less work for some taxpayers.
Because the standard deductions were increased, many taxpayers will find this year that they don’t need to itemize. That, combined with the lower tax rates, should mean that the overall tax burden will be lower. For middle-to-low income taxpayers, those changes should mean significant savings over previous years, said Loretta M. Tubiello-Harr, of Tubiello-Harr & Associates LLC in Coopersburg, Lehigh County.
“For those type of clients, generally, I am seeing a tax savings of around $2,000 to $3,000 from 2017,” Tubiello-Harr wrote in an email.
Other taxpayers, meanwhile, may feel implications from the $10,000 limit on deduction for state and local taxes and real estate taxes. That loss in an itemized deduction – plus the loss of other itemized deductions, such as investment fees and employee business expenses – could end up being costly, depending on an individual’s circumstances, she said.
“For high-wealth individuals, the loss of the investment fees will be a real blow,” Tubiello-Harr said.
While it is too late to make big changes for this tax season, there still are some things that people and businesses can do to better position themselves to take advantage of the 2017 Tax Cuts and Jobs Act beyond double-checking withholding tables to avoid having to write a check to Uncle Sam next year.
Here are some tips and general advice from Loretta M. Tubiello-Harr of Tubiello-Harr & Associates LLC in Coopersburg, Lehigh County, particularly for pass-through entities such as sole proprietorships and S corporations:
- Look for deductions from additional retirement plan contributions for 2018, which still could be made this year.
- Significant opportunities are available with how fixed assets are written off, which still can be used this tax season.
- For the long-term, businesses should conduct a comprehensive analysis of their situations and implement a strategy.
- Section 199A, the 20 percent pass-through deduction, is time consuming to calculate but so is the ongoing planning. “There is no one fact pattern,” she said, so analysis is needed to determine the best options.
- Generally speaking, S corporations may be a more favorable structure for higher-income entities, while sole proprietorships and partnerships/LLCs may be more favorable for lower-income entities.
- For higher-income taxpayers, she said, planning needs to be done around wages to optimize the amount of the 199A deduction.
- Significant work needs to be done around reasonable compensation issues for shareholders/employees to avoid issues down the line, she said.
Individuals and families might find that if they don’t need to itemize, their overall tax strategies will be simpler. But businesses, in particular, will need guidance from a tax professional, at least this year, several observers noted.
“For accountants, the pros are our clients need us more now than ever,” Tubiello-Harr said, whose clients include closely held businesses. “For our client base, we see no simplification. However, there are great opportunities for businesses that were not available before tax reform.”
But, she cautioned, there is no single strategy that will work for all clients.
“Also, some regulations are still unclear or not yet published making our job more challenging,” she added.
At this time last year, some tax experts thought some pass-through companies – like LLCs and LLPs – could benefit from changing their corporate structure to take advantage of the new law’s reduced tax rate on C corporations. However, as the dust settled, it made more sense for pass-through companies to maintain their status, primarily because Pennsylvania’s 9.99 percent tax rate on C corps would eliminate any benefit from the switch, several people noted.
“In other states, it may have made sense,” said Chris Humes, a senior manager in the Wormleysburg and York offices of Baker Tilly Virchow Krause LLP. Not so in Pennsylvania, he said.
Pass-through companies, however, benefit from their own tax break, a 20 percent deduction of any profits that are counted as personal income. The extent of the deduction depends on a taxpayer’s personal income and type of business. It phases out at higher income levels.
Gordon Denlinger, Pennsylvania director of the National Federation of Independent Business, said his organization has seen great benefits from the tax changes.
“The president’s tax plan as approved is very popular with small businesses,” Denlinger said. “That is true across Pennsylvania and across the nation.”
Several accounting observers said they are concerned that a lot of the benefits from the tax plan could be overturned with changes in Washington.
Some of the provisions, such as those benefiting pass-through entities, will sunset in 2025, and Democrats have made clear that they are not fans of the tax reform, noted Steffee, at Simon Lever. That situation is one reason why he advises clients not to make drastic moves.
The tax cut for C corporations – from a rate of 35 percent down to 21 percent – is permanent, accountants noted.
Tubiello-Harr noted that the idea of the 20 percent pass-through deduction was to create parity with the lowered rate for C corps.
What happens in Washington between now and 2025 will help determine whether more businesses will convert from an S corporation to a C corporation, Tubiello-Harr added.