Tax reform: What you and your clients need to know?

The most significant tax reform of the decade was passed on December 20, 2017 and subsequently signed by President Donald Trump on December 22, 2017. The thing left for us is to understand what benefits and shortcomings have come along with it. The new and reformed tax laws i.e. Tax Cuts and Jobs Act have transformed the landscape of tax planning.

Thus some important features to be considered by you and your tax advisors are:

Corporate Income Tax:

If you are a corporation doing business in the United States, you will benefit from a drastic decline in the corporate tax rate. Effective January 1, 2018, corporate income tax rates will decrease from 35% to 21%.

As per The Hill’s Naomi Jagoda and Cristina Marcos report, the bill “creates a 20-percent deduction for income of pass-through businesses that pay taxes through the individual code.”

Corporations operating in the United States face another layer of corporate income tax levied by states. As such, the statutory corporate income tax rate in the United States, including an average of state corporate income taxes, is 25.7 percent. In addition to the 21 percent federal corporate income tax rate, 44 of the 50 U.S. states levy corporate income taxes.

Besides this, corporate earnings and assets that are recovered from abroad will be taxed at a reduced rate of 15.5% for cash and corporate alternative minimum tax (AMT) will be eliminated.

Individual income tax:

Lower individual income tax rates are a big relief but will only fall through 2025. Seven tax brackets remain, with five of them getting reductions of between 1% and 4%, where the top marginal rate is decreasing to 37% (from 39.6%). Along with this the individual alternative minimum tax (AMT) remains with higher threshold than the previous law.

Under the reformed tax laws, individual mandate will be repealed. Affordable Care Act’s individual mandate enforces people to purchase a health insurance or pay a tax penalty. Considering the individual point of view, aged and wealthier people will benefit. As per many of the analyses, poor Americans should not be expecting much under Tax Cuts and Jobs Act.

Considering this particular situation Vox’s Dylan Matthews reported:

“The CBO breaks down the billions of dollars in annual changes to spending and tax revenue by income group, up to people making more than $1 million. What they find is that while the rich as a group benefit each year (as do people making more than $75,000, on aggregate) the desperately poor, earning $10,000 or less a year, lose out consistently — and by 2021, people earning $40,000 a year or less start losing out as well.”

As per the experts, it is said that future generations will stand to lose, particularly if the tax plan balloons the national deficit to the amount for which it’s projected. In the end, we will be required to pay for the tax cuts that were enacted.

Predicting the exact impact on the people would be difficult but as per the experts, young working Americans will be the ones paying the price for this tax reform.

One way or another, those tax cuts are going to have to be paid back, [and] it’s going to be skewed towards future generations,” Goldwein said. “If I’m a betting man, I don’t think it’s going to turn out well for the poor. But all I can say with certainty is that younger generations are going to pay more relative to how much they’re getting in the tax cut.”

Overall this is undoubtedly the largest tax reform experienced in the past fifty years. We are hopeful that it will bring positive economic and earnings growth and proves beneficial for you in your long term financial strategies. To prepare for the new upcoming market and to stay on track you should consult “Morris Teper, CPA, PC”.