Tax Planning After the Tax Cuts and Jobs Act (TCJA)

Tax planning will become more important than ever now that the TCJA has completely transformed the tax code landscape. There are significant implications for tax planning on every level, from individuals to businesses.

The following highlights provide a bird’s-eye-view of what tax planning considerations could be made in 2018 and beyond.

For business owners

Biz Journal takes note of several items that businesses should consider for tax planning. In particular, sole proprietorships and owners of pass-through businesses (partnerships, LLCs taxed as partnerships, and S corporations) enjoy a new tax deduction equal to 20 percent of qualified business income from a qualified U.S. business. (This deduction is also available to individuals, trusts, and estates and expires for taxable years beginning after Dec. 31, 2025.)

However, there are several limitations to consider that will impact whether your business can take the deduction: 

• Qualified business income includes the ordinary income and deductions of a trade or business, but excludes most investment type income such as dividends and interest. Guaranteed payments to partners and reasonable compensation paid to S corporation shareholders or income generated from the business of being an employee are not included. The definition of qualified business excludes “specified service trades or businesses” including, health, law, accounting and financial services, and performing arts.
• Qualified business income is capped at an amount that exceeds either (i) 50 percent of W-2 wages paid by the qualified business or (ii) 25 percent of W-2 wages paid plus 2.5 percent of the unadjusted basis of qualified depreciable property used in the qualified business. Guaranteed payments to partners are not included, although W-2 wages paid to S corporation shareholders may be included.
• Limits on the qualified business income deduction do not apply if taxable income falls beneath $157,000 (315,000 for married taxpayers filing a joint return - MFJ).

For individuals

As the Money Guy notes in a recent report, there are certain steps that individuals will want to consider for tax planning as well, including the following:

Defer or Accelerate Income

• While TCJA still features seven tax brackets, they are slightly modified from the existing tax law. If you find yourself in a higher tax bracket next year due to the adjustments, consider deferring or accelerating your income if you’re able to control it like someone who self-employed or earns a commission.
• As an example, a married couple filing jointly earning $100,000 a year would find themselves in the 25 percent tax bracket in 2017, but in the 22 percent tax bracket in 2018. Therefore, if you were in a position to defer income until after the New Year you could take advantage of your lower tax rate.

529 Plans

The Money Guy notes that under TCJA, they are even more attractive because you can now use a 529 plan toward private K through 12 education expenses, not just college.

Other Considerations for Individuals

Biz Journals also points out that income tax rates are temporarily reduced in the TCJA, with the highest rate at 37 percent. The TCJA also brings other significant changes, including the following:

• Ties the kiddie tax to trust tax rates and brackets.
• Increases AMT exemptions, with adjustments for inflation (not applicable to trusts and estates).
• Increases standard deduction to $12,000 ($24,000 MFJ).
• Increases child credit to $2,000 per qualifying child ($1,400 is refundable), and a $500 nonrefundable credit for qualifying dependents.
• Increases limit on cash contributions to public charity deductions to 60 percent of AGI.
• Eliminates deductions for investment fees, mortgage debt, and other miscellaneous itemized deductions.
• Limits total itemized deduction for state and local income and property taxes to $10,000.
• Limits deduction for mortgage debt interest to $750,000 for indebtedness incurred after Dec. 14, 2017. Previous mortgage debt incurred is grandfathered in and limited to $1 million.
• Excludes personal property from section 1031 like-kind exchanges.
• Eliminates deductions for alimony and excludes inclusion of alimony payments in income for divorce settlements after Dec. 31, 2018.
• Expands section 529 plans to include K-12 education expenses but limits use to $10,000 per year per beneficiary.

For estate planning

Biz Journals also explains that estate, gift, and generation-skipping transfer taxes have increased lifetime exemptions to $11,180,000 per individual with annual adjustments for inflation. This increased threshold expires Dec. 31, 2025.

As you look into the details of your tax planning for 2018 and beyond, keep in mind that this article only highlights some key points of this topic. It does not constitute comprehensive or actionable advice of any sort. It is imperitive that you consult with your own legal and tax professionals before engaging in a definite tax planning strategy.