Remember the talk about Americans, weighed down with the complexity of the U.S. tax system, finally being able to file their taxes on a document the size of a postcard?
Not many people are talking about that, now that the Tax Cuts and Jobs Act is the law of the land.
Steve Boggs, the managing partner of Grant Millman & Johnson, predicts the changes as having an overall positive effect on the economy, although how individuals and corporations will be impacted differ somewhat.
Looking at the system as two “sections”—individuals and businesses—is a good start.
For individuals about two-thirds to three-quarters will see a reduction in overall tax, the result of a change in itemized deductions.
Business owners are likely to see additional benefits resulting from changes to the corporate side of the tax code, including flow-through credits, which are subject to a somewhat complicated formula.
The big winners appear to be the C-Corp entities (the larger companies, like General Motors) who will see their tax rate drop from 35 percent to 21 percent. For closely held (S-Corp and partnerships) the drop won’t be as much.
Still, Grant Millman, based in Novi, Mich., says a reduction in five of the law’s seven tax brackets (a number that carries forward from the previous code), the rates of tax are reduced for all but two, the exceptions being the 10 percent and 35 percent brackets.
But back to the goal of simplicity for a moment.
It turns out that eliminating the deduction for personal exemptions and a near doubling of the standard deduction will have the effect of reducing by half the number of taxpayers who would otherwise do better by itemizing deductions.
“Of course, that group will realize less of a net tax benefit than those taxpayers who do not now itemize,” says a document sent to Grant Millman clients. “The loss of many itemized deductions will channel an even greater number of taxpayers to the standard deduction.”
Some of the changes are temporary in nature, typically expiring after 2025, which means taxpayers need to look ahead when considering their long-term strategies.
On the business side, sweeping changes now entrenched in law include the corporate tax rate reduction as well as a litany of adjustments in areas like bonus depreciation, the treatment of items purchased (expense or capitalization), interest deductions, and how income from partnerships, S corporations, and sole proprietorships is treated.
Clearly, the best advice is to consult a professional.
Boggs of Grant Millman said the changes definitely add to the complexity of tax law (formally known as the United States Internal Revenue Code).
“We’ll be seeing a significant amount of regulations coming behind that,” he said. “Those will explain what lawmakers are trying to do.”
For Boggs, that’s typical.
“When the original proposal was brought forward, around the September timeframe, it was pretty straightforward,” he said. “We thought ‘this isn’t so bad’ but then once the politicians got into it, there was a fair amount of horse trading going on, which complicated things.”
And that has generated questions that have yet to be answered with a high degree of certainty.
“From a small business owner standpoint, it’s definitely more complicated,” added Boggs.