The laundry list of changes nestled within the TCJA has created a great deal of uncertainty about the future for American taxpayers and their tax preparers. While many of these new changes will likely create a positive outcome for individuals and business owners alike, a myriad of these modifications also comes with various nuances and exceptions that can make navigating the new laws quite complex.
Further, more ambiguity lies in the unknown. Will Congress extend the dozens of tax breaks that expired last year? And will the IRS grant U.S. taxpayers with more specific guidance for navigating these changes?
While some say it’s wise to wait until such guidance is presented to the public, most tax professionals are sitting solidly within the camp of “the sooner, the better.” In other words, this year more than ever, it is vital that taxpayers are proactive when it comes to tax planning.
Why You Need to Start Tax Planning NOW
If you know us at all, you know we are passionate advocates of proactive tax planning. But we aren’t kidding when we say that you absolutely must begin preparing for next tax season sooner rather than later.
First, if you’ve traditionally taken advantage of certain deductions year after year, it’s crucial to take another look at your tax situation. These deductions may no longer be an available option for you, so it’s important to know what to expect in advance.
Secondly, business owners are significantly impacted by the TCJA. Between depreciation limitation increases, deduction eliminations and additions, and everything in between, it’s likely that your tax situation has grown much more complex. Even individuals who’ve had complex tax returns in the past need to meet with their tax professionals as soon as possible in order to avoid a nasty, unwelcome surprise down the line.
Important Tax Changes that Could Affect You
Now that we’ve reinforced the importance of contacting and meeting with your tax pro ASAP, you may still be wondering which tax changes could possibly affect you. While there are numerous modifications to tax law that could affect any number of people and businesses in numerous ways, here are a few that are key.
If You’re an Individual
The Pass-Through Deduction
Simply put, the pass-through deduction in the TCJA creates a deduction of up to 20% of income from partnerships, sole proprietorships, and S corporations. Since the majority of American businesses are pass-through entities, most business owners and their tax preparers should keep an eye on this one.
However, the pass-through deduction becomes much more complex than that. Pass-through businesses fall into two categories, and then business owners in those categories are divided up even further. In order to receive the deduction, these business owners must make certain calculations and, for those making more than $315,000 annually, things get even more complicated to assess.
Further, there are certain limitations for some businesses that may not apply to others for a gamut of reasons. The point is, in order to navigate this complex process, it is extremely important to consult with a tax professional to ensure you’re receiving the maximum possible deduction for your unique situation.
The State and Local Tax (SALT) Deduction
Another deduction affected by the TCJA is the SALT deduction. The new laws have placed a limit on the amount of state and local taxes taxpayers can deduct from their federal taxable income to $10,000.
In addition to altering a long-standing status quo, there has been confusion surrounding prepayment of property taxes as well as the deductibility of charitable donations and whether or not these practices will be completely prohibited.
As mentioned before, if the SALT deduction was one on which you relied upon before, now is a good time to sit down with your tax professional to create a plan of action.
Home Equity Loan Interest
Now prohibited is the deduction on new and pre-existing home equity loan interest. With that said, some taxpayers may still be able to take advantage of the deduction if their home equity loan was used to purchase, build, or improve the home. Of course, this is all subject to other caveats.
Homeowners should stay abreast of tax issues that will affect them, but it can be difficult to know which do. That’s where the professionals come in.
If You’re a Business Owner
Business Interest Deduction
Along with the TCJA came a limit on the deduction of business interest to 30% of adjusted gross income but, of course, it isn’t that simple. There are somewhat ambiguous guidelines concerning the difference between investment interest and business interest. Further, how exactly this will apply to pass-through entities remains to be seen.
While there have been addendums somewhat clarifying the parameters of this new limit, it is still difficult to muddle your way through the rule. There are certain exemptions that exist for some entities in addition to special rules pertaining to farms and real estate businesses that could grant them a one-time exemption. Also, guidelines can differ depending on the type of entity (for example, a partnership versus an S corporation).
Business owners must sit down with their tax planner as soon as possible in order to iron out these complex details.
100% Bonus Depreciation
With the TCJA, companies can now write off the cost of all qualifying assets that are purchased and used. In addition, the limit on expensing business assets has increased to $1,000,000. There are also other types of property now eligible for expensing, as well as certain improvements made to commercial buildings and properties.
This is an example of a change you don’t want to forget to take advantage of, if at all possible. A knowledgeable tax pro can help make sure you don’t miss the opportunity if you’re eligible.
New Limit on Business Losses on Individual Returns
Although it was once possible to take a hefty business loss on your return, this is no longer the case with the TCJA. A couple filing a joint return is now limited to carrying $500,000 over on their return, while a single filer is limited to taking $250,000 in losses.
Obviously, any cash exceeding these amounts is nondeductible, but the law does allow for exceeding amounts to be carried over if needed.
Confusion Regarding New Laws Can Cost You
Whether you’re filing as an individual, couple, or are a business owner, it’s likely that the new tax laws will affect you. It’s also pretty likely that most of these provisions will be somewhat confusing. However, this confusion can cost you.
You don’t want to go into tax time with the assumption that you’ll still be eligible for certain breaks that have expired, and you also don’t want to miss out on new deductions for which you may be eligible. That’s why it’s important to head into this new era armed with knowledge and a seasoned tax pro at your side.
