As usual, the New Year starts with getting ready for tax season. This year there are drastic changes in the way federal income taxes are calculated - thanks to the Tax Cuts and Jobs Act (TCJA).
You’ll want to make sure that your accountant knows these new tax laws inside out so that they will take advantage of the changes for you. If you’re using us to handle your taxes, rest assured we’re already ahead of the game.
A few major changes you should know
1. Tax forms have changed and include additional Schedules. To accommodate the many changes made by the TCJA, tax returns have been revised. In many instances, the returns require new information that did not have to be supplied in the past. Also, the return for individuals (Form 1040) has received a dramatic makeover with a ‘postcard’ look and six accompanying schedules.
2. If you have business income, you might be able to deduct up to 20% of ‘qualified business income’ from your sole proprietorship and/or pass-through entity. Although this deduction is beneficial, there is a complex set of rules that might end up reducing or even eliminating it. The CPA doing your tax preparation will need to have a thorough understanding of these rules and know how to apply them in order for you to receive the highest deduction.
3. States react differently to changes to federal tax law. Because most states haven’t automatically conformed to the TCJA, two different sets of rules will need to be applied to your federal and state income tax returns. Knowing which set of rules apply is important to maximizing your tax savings.
4. The new law no longer allows you to deduct interest on a home equity loan. However, the IRS has said that such interest is deductible if the funds were used to buy, build, or substantially improve the home that secures the loan. Your CPA will need to be able to trace the proceeds of your home equity loan.
5. Personal exemptions and some itemized deductions were eliminated - but they were replaced with an increase in the allowable standard deductions. Your deduction information for taxes, mortgage interest and donations still need to be gathered as usual - but your tax preparer will need to work out whether utilizing the standard deduction is better for you.
6. You may now be eligible to claim the child tax credit. In the past, you may have earned too much money to take advantage of the child tax credit (for kids younger than 18). Thanks to the TCJA you now likely qualify for it! Although you’ll benefit greatly from the credit, there are due diligence requirements that will need to be performed. Your tax preparer will have to ask you additional questions, document your responses, review documents, and complete a new form with accompanying worksheets.
7. New, additional TCJA due diligence regulations apply if you file as Head of Household. Your tax preparer will need to ask you questions and gather additional information to make sure you qualify for this status.
8. Unfortunately, entertainment expenses are no longer a deductible business expense. But the IRS has clarified that 50% of business meals are deductible if food or beverages are purchased separately from entertainment (or stated separately on one/more bills, invoices or receipts). If your accounting system lumps meals and entertainment together, your accountant will need to separate deductible meal expenses from non-deductible entertainment. Read our article on the new requirements for the business meal deduction to learn more.
More complexity, lower taxes (usually):
As you can see, there are several new opportunities to save on your taxes. Based on these points and other tax law changes, your accountant will likely need more time (and charge higher fees) to prepare your returns. Even with the potential fee increase, the good news is that more work on our end usually means lower taxes for you.
Click the button below to schedule a free consultation with one of our CPAs to learn how you can use the new tax law to lower your taxes.