What Tax Reform Could Mean For Your Clients
By: Michael J. Tedesco, Esq.
On December 22nd, 2017 with one stroke of a pen, president Trump signed into law the most sweeping tax law changes in a generation. For the first time in over 30 years tax professionals will confront significant changes in the tax law that will impact planning, reporting and enforcement matters. While the true impact of these changes won’t be fully realized for months and years to come, we thought it would be appropriate to highlight some of the significant changes in both the personal and business aspects of the new tax law and provide some insight as to how these changes may impact taxpayers from an enforcement perspective in the years to come.
- Adjustments to the standard deduction and personal exemptions. The standard deduction is increasing to $12,000 for a Single filer ($24,000 for Married Filing Joint) and $18,000 for Head of Household. Personal exemptions have been eliminated. These changes are effective for tax years 2018 through 2025.
- Miscellaneous itemized expense deductions have also been eliminated, which includes the deduction for employee business expenses.
- The mortgage interest deductionfor married couples filing jointly to will be reduced to now apply to only $750,000 of acquisition indebtedness, down from $1,000,000 under current law. There are exceptions to this provision for debt incurred, or treated as incurred, prior to December 15, 2017.
Enforcement Prospective: The increase in the standard deduction and the elimination of personal exemptions will require the IRS to rethink how to calculate withholding using Form W-4. Additionally, it may eliminate many of the issues that are often the subject of correspondence audits. As employee business expenses claimed on Schedule A are a common target of audit, this may reduce the audit burden for many individuals. However, the elimination of employee business expense deduction, will certainly have a negative financial impact on employees in certain professions that have historically placed significant expense burden on individual employees.
- The Estate and Gift Tax Exemption will be increased from $5,000,000 to $10,000,000. The increased exemption of $10,000,0000 is still subject to the increases for inflation.
Enforcement Prospective: Doubling of the Estate and Gift Tax exemption will significantly lower the number of individuals susceptible to the estate tax. Given the expected decrease in individuals subject to the estate tax, it is possible that this may allow IRS to reallocate resources and increase scrutiny on gift and estate tax returns filed. Tax professionals should be reviewing their past estate planning for clients who may now fall within the new exemption. Clients who are impacted by the change in exemption amount may wish to revisit any previous estate planning.
- The deduction for State and Local Taxes will be limited $10,000 ($5,000 for Married Filing Separate). For many in New York, the new SALT limit may not even cover their Real Estate Tax burden.
Enforcement Prospective: There is a question about the deductibility of State and Local taxes paid in 2017 for both income tax and property tax. While the tax law specifically excluded prepaid State and Local income taxes, the provision that excluded prepaid income taxes was contained within a section that applies to tax years 2018 through 2025. Therefore, there are questions as to whether the language of the statute can actually apply to the 2017 tax year. While property taxes were not similarly excluded in the statute, there is a question as to what property taxes are deductible in 2017. IRS issued guidance in the form of IR-2017-210, released on December 27, 2017, indicating that property taxes already assessed would be deductible. The relevant statute, I.R.C. Section 164, identifies property taxes as deductible when paid or accrued. The statute itself makes no mention of when the property taxes are assessed. The difference between the statute and the IR-2017-210 may raise audit issues for taxpayers prepaying property taxes in hopes of a maximizing their deduction in 2017.
- The corporate tax rate will be reduced from 35% to 21%. This may have a more significant impact on smaller corporations who tend to engage in less tax planning. Congress has also eliminated the corporate AMT.
- To ensure that pass through entities were not disadvantaged by the change in the corporate rate, a 20% business income deduction has been added. While there was significant debate regarding the exclusion of certain service businesses being denied the business income deduction, the final version of the legislation included a limited deduction for specified service businesses.
- Many more businesses will be able to use the cash method of accounting. Thresholds for the gross receipts test are increased from $5,000,000 to $25,000,000.
Enforcement Prospective: With the significant decrease in tax rates for corporations and for qualifying business income for pass through businesses and only a small decrease in personal income tax rates, this change may create new audit issues with respect to the allocation of earnings as wage income/guaranteed payments and business income. Expanding the number of businesses that are able to use the cash method of accounting may greatly simplify accounting and reporting for many small businesses. A business employing the cash method also generally has more control over when income and expenses are reported.
With so many significant changes coming with such short notice, tax professionals need to be cautious that any tax planning carefully considers the ramifications of the changes in the law. Given the lack of judicial interpretation on these provisions, there may be significant questions with respect to proper reporting for the foreseeable future. These uncertainties may also lead to changes in enforcement priorities from the IRS. Should you have any questions or concerns on how any of these changes may impact you or your clients, the Tax Controversy Attorneys at Andreozzi Bluestein can help. Feel free to call us anytime without obligation.
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