2017 Tax Reform Reflections

Since the recent signing into law of the Tax Cuts and Jobs Act on December 22, 2017, the CK team has received many inquiries about its effect on future tax burdens. According to a recent survey from HubSpot, 88.5% of small businesses don’t understand the full impact of the tax bill. It’s apparent that business owners are seeking more clarity. As your trusted business advisors, we hear you loud and clear. To help you get through this transition, we will be posting our latest insights into the effects of the new law. You can subscribe here to receive our weekly email updates.

We have reviewed numerous significant provisions in Tax Reform and thought we would wrap up our series with a reflection on how we expect to see these tax changes affect taxpayers.

Individuals – Check Your Paystubs

As a result of Tax Reform, the IRS issued new withholding tables that employers began to use in February to determine the federal tax withheld from workers’ pay. The new tables make broad assumptions, including the assumption that your tax liability will decrease under Tax Reform.

According to Bloomberg, 6% of individual taxpayers will have a tax increase under the new laws. Individuals with high state and local tax deductions that will now be limited are particularly at risk for 2018 tax increases. We highly recommend that you run a 2018 tax projection to determine the impact of the changes on your individual tax bill (if you are a CK client, we have provided you with this analysis), and see if your withholding is in step with the projected tax. If not, be sure to file a revised W4 with your employer. Failure to do a mid-year review could result in an unexpected tax surprise come next April.

Qualified Business Income (QBI) Deduction – Questions Remain

Are you a specified service business? How is the W2 wage limitation applied to LLC owners receiving guaranteed payments? These are just two of the biggest questions that remain outstanding as we consider the QBI deduction and its impact on your 2018 tax bill.

Those businesses that are not specified service businesses (businesses that rely more on capital than personal expertise or experience) and have a large employee base will clearly benefit from the changes (i.e. manufacturers with many employees). While these businesses lost the 9% Domestic Production deduction, they should receive the full benefit of the 20% QBI deduction.

What About State Changes?

When the federal laws changed, states responded in a surprising way. In particular, high tax states such as California, New York and New Jersey have put forth new provisions to allow taxpayers a “work around” to the state and local tax deduction limitation. The states are proposing a charitable fund setup, where taxpayers can make fully deductible donations to the state, which would be credited to their state income tax. Illinois has recently taken preliminary steps to follow the other states’ lead. We will keep you informed as these plans continue to unfold.

Final Thoughts

We believe the Tax Reform will bring a number of opportunities to reduce taxpayers’ overall tax burden. The key is being proactive, and for us, being up to speed on what we expect to be a number of regulations clarifying the new provisions. While we will take a break from our weekly posts, we will bring you updates as they become available over the summer.

In the meantime, please don’t hesitate to call us at 630-953-4900 with your questions.