The Tax Cuts and Jobs Act (TCJA) was signed into law on December 22, 2017. This legislation introduces the biggest changes to taxation of your income in over 30 years. We are summarizing and highlighting the changes introduced with this legislation to allow for the best opportunity to utilize these changes. We encourage you to call us with questions, or to schedule a meeting to evaluate how these changes effect you.
This tax legislation has received much coverage in the news media, and is sometimes referred to as “tax simplification.” While many – and perhaps most – clients will pay lower overall taxes with the new rules, as you will see, simplification was neither the goal nor the result of this tax bill. The TCJA redefines self-employment income, using a new concept called Qualified Business Income. Tax brackets have changed, tax rates are lower throughout the new brackets, child credits have been enhanced, and itemized deductions were thoroughly overhauled. Other changes are included as well.
What is Qualified Business Income?
Qualified Business Income (QBI) is income reported to a business owner via a Schedule K1 (from your S-Corporation or Partnership), Schedule C, or Schedule E. For married taxpayers filing jointly with income of $315,000 or less, or others with income of $157,500 or less, you may be eligible to exclude 20% of this income from taxation on your Federal tax return. There is an alternate calculation based on wages paid in the business, and the fraction of wages attributable to each owner. Note that the Qualified Business Income deduction is phased out for married taxpayers with income over $415,000 and other taxpayers with income over $207,500.
Wages paid from an S-Corporation to the owner do not qualify for treatment as QBI. Guaranteed payments to a partner also do not meet the QBI definition and also do not receive the QBI benefits.
How to Capitalize on the Qualified Business Income Opportunity
Getting the most from this new and beneficial concept requires planning, with focus on the following:
- Overall taxable income reported in your return
- For S-Corporation owners, the balance of wages vs. schedule K-1 income
- For partners, discrete decisions about the level of guaranteed pay
- Depreciation expense, including bonus depreciation and Section 179 elections
- Wages paid to employees and owners throughout the entire business
We look forward to assisting you with a tailored plan that ensures access for you to this innovative and beneficial new tax law.
Tax Cuts and Jobs Act Changes for Individuals
The Tax Cuts and Jobs Act (TCJA) offers the following benefits for individual taxpayers:
- Reduced tax rates ranging from 10% to 37
- An increase in the Standard Deduction
- Increased child tax credits – increasing from $1,000 to $2,000 for most qualifying children
- Eligibility to pay pre-college educational expenses with funds from a 529 Plan
The Tax Cuts and Jobs Act also implements the following changes:
- The itemized deduction for State and Local tax paid is now capped at $10,000
- Interest on home equity loans is no longer deductible
- Interest deductions are available for the debt on $750,000 or less used to acquire a primary residence
For clients in Minnesota, the new limitations on deductibility of state and local taxes paid has the potential to increase Federal taxable income. Those who’ve made estimated tax payments in the recent past may need to update the estimates in light of this change.
Minnesota Compliance with the Tax Cuts and Jobs Act
As of this writing, no legislation has emerged from the State of Minnesota that integrates the TCJA, or offers any change from prior law regarding the definition of taxable income, applicable tax rates, and the always-vital regulatory details that govern the collection of the tax due. Once these issues have been addressed, and a new bill is available to us, we’ll provide an additional update.
This update is a summary of one of the biggest changes to tax regulations ever made. Many details will become clear as the law is implemented and enforced. And your situation is unique from all others – the details matter. Please call for an appointment so that we can help you plan and receive the maximum benefit from these changes.
Lordan & Camp, PLLC (952) 934-8405