U.S. New Tax Law

Federal tax laws were overhauled by Congress for the 2018 tax year, lowering taxes for many people but eliminating lots of deductions. The effort was promoted as simplifying taxes but for those accustomed to doing things one way for decades, the changes may sow confusion.

Winners Under the New Tax Law

One category that came out on top of the changes to tax laws was the pass-through corporation, particularly those with business assets to claim. Pass-through corporations are those companies that file Schedule C returns, itemizing business deductions, yet pay taxes at the owner’s personal rate rather than at a corporate rate. They are called pass-through companies because taxes are paid by the owner who is usually sole proprietor. Under the new tax code, these types of companies saw a 20 percent reduction in qualified business income, specifically employee salaries or investments in assets. That means if you picked up new computers for your office, a company vehicle, or cell phones, your company could reduce its taxable net business income by 20 percent.

Curiously, there are some exceptions to eligibility for this benefit, including performing artists, athletes, accountants, brokers, and others, while the law allows engineering companies and architects to claim it. The computation of this deduction is rather obtuse and best researched thoroughly.

Also, sole proprietorships (and other businesses) counting their pennies can still deduct 50 percent of meals but can no longer claim entertainment as a business expense – and the two must be kept separate.

In brief, the new tax law’s benefits fell mostly on those who were already wealthy:

• it kept the same tax brackets but lowered the tax rates;
• it reduced the scope of the alternative minimum tax that was designed to keep the wealthy from avoiding taxes through deductions;
• by lowering the percentage of income subject to 40 percent inheritance taxes;
• it allows parents who put money in 529 plans to pay for their children’s college educations to  use $10,000 of that money for private and religious primary schools;
• it capped deductions for property taxes at $10,000, penalizing residents of high tax states, and
• did away with the individual mandate for health insurance that was created under the Obama administration’s universal healthcare initiative – likely resulting in many less-affluent people going without health insurance.

Impact on International Businesses

The new tax act uses a carrot-and-stick approach to bringing assets and earnings back into the U.S. from tax shelters abroad: it’s allowing companies to invest their overseas earnings in U.S. assets and ventures at only a 15 percent tax rate, paid over eight years. However, this requirement does not allow them to deduct taxes paid to a foreign government. For this, to work the law created a new category called the Global Intangible Low-Taxed Income (GILTI), which shareholders must claim on their personal taxes.

Check Your Withholdings

Average people felt the effects of the new tax laws too, particularly when news reports began to surface in early 2018 of smaller-than-expected tax returns. Most blamed faulty pledges of lower taxes, but in fact, the smaller returns were a result of not changing withholding allowances on paychecks. The employees who complained of small tax returns had actually received the benefit of the new tax laws through slightly larger paychecks that were probably difficult to discern when spread over many weeks.

Dependent and individual exemptions have been discontinued, so it no longer benefits the taxpayer to keep withholdings low. Also, the standard deduction has doubled, to $12,000 for single taxpayers and $24,000 for married couples filing jointly, negating itemized deductions.

Keeping withholding close to the tax threshold or paying estimated taxes up front will help individuals avoid a costly penalty in the future. The IRS requires that at least 85 percent of taxes come from these sources, but waived the requirement in 2019 due to the recent changes in the law. Updating one’s withholding is the best way for most people to stay current with taxes owed. Use this link to visit the IRS “paycheck checkup” function to ensure you’re withholding the proper amount.

Changes Affecting Dependents

A child tax credit replaced deductions for dependents in the 2018 tax year, and higher income families will benefit. The new threshold for the $2,000 credit per child under age 17 is $400,000 for married couples filing jointly and $200,000 for others.  Families must meet an income requirement to claim these credits. Provisions allow a $500 tax credit for other dependents (such as elderly parents or older children who qualify) whose income falls within a certain threshold

Effects on State Taxes

Residents who deduct charitable contributions from state taxes now have to reduce that contribution by the amount their state taxes were reduced by the gift when seeking federal credit. However, “[A] taxpayer who makes a $1,000 contribution to an eligible entity is not required to reduce the $1,000 deduction on the taxpayer’s federal income tax return if the state or local tax credit received or expected to be received is no more than $150,” according to IRS guidelines.

While taxpayers were able to deduct a bunch of different states and local taxes from their federal taxes in the past, the new tax law caps those deductions at $10,000 in total. And for those who have a large home equity loan or a second home, the news is even worse: the credit for interest on a mortgage has been trimmed to only the first $750,000 of the loan, and the credit for interest on home equity loans up to $100,000 has been eliminated.