What to Do Now to Get Ready for Tax Year 2018
Tax season is in full swing this time of year. Whether you own a business or collect a paycheck as an employee – you’re probably concerned with how much money you owe the IRS in taxes. While your CPA is figuring that out for you, it’s a good time to think about tax year 2018. After all, the newest tax bill that was passed at the end of 2017 is going to change things for a lot of people and companies. Here is what you can do to get ready.
How the Tax Bill Affects Individuals
The new tax bill has changed a lot of things on an individual level. For one, the income tax brackets have changed. While the proposed plan was supposed to simplify things, there are still seven tax brackets. Under the provisions, individuals in every tax bracket can expect to see a reduction in the amount of taxes they owe. And you don’t even have to wait until next year to see the difference, because your paycheck deductions should decrease – leaving you with a higher net pay.
It’s important to know that the tax plan could still affect you adversely. That’s because the personal exemptions are gone. In their place is a higher standard deduction. This simplifies taxes to some extent, because now fewer people will take advantage of the itemized deduction. That’s because itemized deductions are unlikely to exceed the higher standard deduction. Overall, this could mean a slight increase in your taxable income if you normally itemize.
Which Steps Individuals Should Take
How the new tax plan will affect personally depends on your specific situation. So here are two things we recommed you do:
1. Calculate your estimated taxes for 2018
2. Adjust your withholdings on your W4 or make estimated tax payments
Of course, you don’t have to do this yourself. Calculating how much taxes you’ll owe by the end of the year is just as difficult as filing your tax return. Your CPA can do the calculations for you and let you know what (if anything) you should do about tax withholdings and estimated payments.
Changes for Businesses
The Tax Cuts and Jobs Act – referred to as the Act for short – includes more tax cuts for businesses than individuals. For example, it decreases the maximum corporate tax rate from 35% to 21%. Of course, most businesses haven’t been paying 35% in taxes, because they use their tax accountants to legally reduce their taxable income.
The Act also includes new provisions where businesses can write off the cost of certain depreciable assets. Instead of amortizing the expense over several years, this could reduce your taxable income all in the year you have the expense. This only applies to equipment that was purchased between September 27, 2017 and January 1, 2023. This does not apply to structures, but it could make a difference for your company’s tax liabilty for several years to come.
Pass-Through Income Provisions
The new tax plan also allows pass-though businesses a 20% deduction of income – subject to limitations. These limitations are quite complicated, and the IRS is expected to issue further guidance as the year progresses. However, if your business qualifies and you make less than $157,500 as an individual taxpayer or less than $315,000 for married filers – you could potentially benefit from this pass-through deduction. It applies to businesses that aren’t taxed but where the income passes through to the individual. This includes sole proprietorships, partnerships, LLCs, and S Corporations.
The pass-through provisions were created to make up for the fact that the corporate tax rates went down. Otherwise, without the pass-through provisions, there would be no point in creating the pass-through entity, because companies are now taxed at lower rates than individuals.
What Businesses Should Do Next
Other changes that indirectly affect businesses are the tax withholdings for individuals. Technically, most businesses should collect new W4s from their employees and update the records. That’s because old W4 forms took into account the personal exemptions – which no longer exist.
More importantly, if you’re running a business, you should schedule a meeting with your CPA. The new tax plan will affect your after-tax income in many different ways. You may want to re-evaluate planned mergers and acquisitions until you understand the impact this will have on your tax liability. Tax planning has never been more important than now with so many changes taking place at once.
Camputaro and Associates
Certified Public Accounting Firm
136 N. Orchard Street, Suite 8
Ormond Beach, FL 32174