Overview of Tax Law Changes
The Tax Cut & Jobs Act was signed into law on December 22, 2017, setting the stage for new tax codes and rules effective January 1, 2018. An emphasis of the new tax bill is a change in tax rates for both large and small businesses that is expected to stimulate economic activity via new and higher paying jobs.
Both companies and individual taxpayers will see broad changes for deductions and tax rates. Affecting essentially every taxpayer is the increase in the standard deduction, which is meant to simplify the tax preparation process by replacing itemized deductions with a larger standard deduction.
The new tax bill essentially doubles the standard deduction from its current levels, thus simplifying the entire tax process for many tax filers. This is so because the standard deduction is used instead of itemizing expenses in various categories. The Tax Policy Center estimates that those who itemize would fall from 30% to 5%, hence spending less time on identifying expenses to deduct and less of a burden on the IRS.
The IRS estimates that about 95% of the businesses in the United States are pass-through entities, such as sole proprietors, S-Corps, LLCs, and partnerships. These entities are called pass-throughs because the profits generated are passed directly through the business to the owners, which are taxed at the owners’ personal income tax rates. Under the new tax law, many, but not all, of these business owners will now be able to deduct up to 20% of pass-through income within limits, reducing their overall tax liability. According to the Tax Foundation, pass-through businesses account for over 55% of all private sector employment, representing over 65.5 million workers nationwide.
Some of the tax provisions enacted by the new tax act will be temporary, while others will be permanent. The cost of reduced tax revenue brought about by tax cuts may only be viable for a certain period, thus producing more immediate tax benefits in earlier rather than later years.
We encourage you to discuss the finer details of this new tax legislation and how it will impact you and your family with your tax advisor. And as always, please rely upon your Madison team as an additional resource.
Important Note: This material is for informational purposes only and is not intended to serve as a substitute for personalized investment advice or as a recommendation or solicitation of any particular security, strategy or investment product. Madison Wealth Management does not provide tax, legal or accounting advice. © Madison Wealth Management 2018