Why The New Tax Laws Are Like New Years Resolutions – Not All Of Them Will Last
Although there was a great deal of press coverage of the latest tax reforms in the media over the last few weeks, it is critical that people realize that not all of these changes are permanent, and in that respect, financial planning needs to take this into consideration. Every financial decision made needs to be carefully planned and implemented, and in order to accomplish this, a basic understanding of the changing financial landscape is a prerequisite for future success. Many of the tax changes are due to begin on the 1st January 2018, so let’s dig a little deeper to help you make the right decisions.
The Changes To Individual Tax Codes
There are four significant changes to individual tax codes which take effect from the 1st January 2018 – All of these changes expire at the end of 2025
Increased exemption for the alternative middle tax – High-income taxpayers will now have to calculate their tax bill twice, under AMT rules and also via the regular income tax framework. They then have to pay the higher of the two figures.
Individual Tax Cuts – In essence, the headline is that for people in the highest tax bracket, there will be a cut from 39.6 to 37%.
Expanded child tax credit – Potentially this could be worth as much as $2000 per child
Doubled exemption for estate taxes – This would enable families to leave a much higher percentage of their estate to their heirs
There will also be an increase in medical expenses deductions, which will be retroactively implemented, and will apply for two years from the 1st January 2017 thru Dec 31st, 2018.
In 2019 there will be the permanent introduction of deductions for alimony payments, and Obamacare individual mandates will begin to be repealed.
Corporate Tax Code Changes
The tax changes are far-reaching and significant affecting all aspects of the financial landscape. Potentially the most significant difference, and indeed the headline grabber is the permanent reduction of the corporate tax rate from 35 percent to 21 percent effective from 1st January 2018.
However, as with all tax cuts, there will always be changes that are not so beneficial, and beginning in 2018, interest deductions will be limited to 30 percent of earnings, before interest, taxes, depreciation, and amortization. And it doesn’t stop there, as the years roll by to 2022 depreciation and amortization expenses will also be removed from the equation. This compares to the current rules where companies are allowed to deduct 100 percent of interest payments from taxable earnings.
Another significant change which will be retroactively introduced from Sept 26th, 2017, is the opportunity for businesses to deduct the cost from assets acquired instantly. This should provide many business owners with a huge boost, but it will require attention to detail and moving relatively quickly as it will be phased out at a rate of 20 percent per year until it disappears totally in 2026.
Finally, from the start of 2022, research and development costs will have to be written off over a five year period, rather than immediately as is currently the case. To put this one tax change alone into perspective, this change is estimated to raise nearly $120 Billion in tax revenue over the next decade.
International Tax Code Changes
In a determined push to prevent companies based in the United States, or for that matter foreign subsidiaries, located in the United States, sending their profits offshore to avoid taxation, a new base-erosion, and anti-abuse tax will be implemented in 2018. The tax will be at a rate of five percent, doubling to 10 percent in 2019, rising once again in 2026 to 12.5 percent.
In a further drive towards returning profits and funds to the United States companies will now have to begin repatriating their foreign earnings. They must start implementing this in 2018, although they will have the opportunity to apply the entire process over an eight-year period. To smooth this process and accelerate implementation, companies can take advantage of a special one-time tax rate of 8 percent of illiquid assets and 15.5 percent cash.
There is no doubt that these tax changes are both far-reaching and significant, there are time limits on some of the benefits, and failure to implement decisions could prove costly, so our advice would be to consult one of our local tax experts, and take maximum advantage of the cuts where possible.
Need Help This Tax Season?
We know the tax season is coming up, and many of you guys will be running into questions with the new tax laws. Because of this, we have created the Tax Support Network, which is an online live chat room that only California Tax Preparers will have access to. In there, you can ask any question and expect an answer within minutes from other fellow tax preparers. If you are already a student of Tax Course Central, make sure to use the coupon code TCCSTUDENT to receive 10% off your subscription to the Tax Support Network. To read more information on the Tax Support Network, and how to join, visit https://www.taxcoursecentral.com/tax-support-network