Posted on Nov 7, 2017

Historic Tax Reform Compared to Today

The alternative minimum tax (AMT) arose as part of the Reagan administration’s tax reforms. In addition to simplifying capital gains rates and taxation, the top marginal tax rate dropped from 70 percent to 28 percent. The AMT and passive activity rules were put in place as a way to close “loopholes.”

Lower tax rates sound good until we note the loss of certain itemized deductions that have never returned, such as deducting credit card interest and a dependent’s student loan interest. However, marginal tax rates were raised over and over again through the 90s. Additionally, since that time, more middle class Americans who saw their incomes rise during the industrial and tech booms have been getting caught in the AMT trap.

Therefore, if additional itemized deductions and other “loopholes” are removed or curtailed, history shows that they will not come back even though the federal government still has the option to raise marginal tax rates. This could be really costly to taxpayers in the long run.

Your Tax Planning Prediction

If I were to look into my crystal ball on tax reform, I would predict that the “reform” that eventually passes will look a whole lot different than this initial framework.

My standard guidance to clients is to look at their own individual tax situation and continue to leverage opportunities that range from tax-deferred savings to keeping track of potential itemized deductions. If a major event has occurred or is on the horizon this year, talk to your CPA about its potential tax impact under the current tax code.

For companies, it is too early to tell if a change in business structure is a good move for tax purposes. We recommend that clients sit tight with their current business structure until we have more clarity on how different business structures will be taxed.

Ultimately, consider your business goals and planning for investments or equipment purchases. Consider the current equipment expensing and bonus depreciation rules, the time frame for which your company will need the equipment, and your projected profits when making the decision whether to invest this year or next. The same holds true for estate planning. Planning with the guidance of your trusted advisors keeps you and your family in more control regardless of the next version of federal tax legislation.

As soon as we see some actual legislation from the Hill, there may be more to discuss for you or your company. Think of Cornwell Jackson if you are in need of longer-range planning, reporting support or guidance. And stay tuned!

Download the whitepaper: Tax Reform 2017 – How New Tax Legislation Will Affect Businesses and Individuals

Scott Allen, CPA, joined Cornwell Jackson as a Tax Partner in 2016, bringing his expertise in the Construction and Oil and Gas industries, and 25 years of experience in the accounting field. As the Partner in Charge of the Tax practice at Cornwell Jackson, Scott provides proactive tax planning and tax compliance to all Cornwell Jackson tax clients. Contact him at Scott.Allen@cornwelljackson.com or 972-202-8032.

Posted on Nov 6, 2017

There are more interesting proposed tax changes for individuals than on the business level. The proposal calls for seven individual tax brackets to be replaced by just three, potentially 12, 25 and 35 percent.  It also calls for eliminating the so-called “marriage penalty” and expanding the standard deduction. However, some of these proposed changes could end up hurting some taxpayers more than helping them.

According to the Wolters Kluwer report, the math for some taxpayers under the proposed higher standard deduction vs. taking the current standard deduction plus personal exemptions does not seem to add up well.

“Under the inflation adjusted amounts for 2017, a family of four filing a joint return could claim a standard deduction of $12,700, plus $16,200 for four personal exemptions of $4,050. The result reduces adjusted gross income by $28,900. Under the GOP framework, the standard deduction for married filing jointly is only $24,000 with no exemptions. The result would be that the family’s taxable income would be increased by $4,900 as compared to 2017 inflation adjusted amounts.”  

The framework calls for an expansion of the child tax credit.  The amount of the credit would increase and be made available to more income groups.

The framework also proposes significant changes to itemized deductions. Nearly all the itemized deductions will be eliminated except for mortgage interest and charitable deductions. Note that property, sales, and income tax deductions are targeted for elimination.

A significant impact on our clients is the proposed concept of capping itemized deductions. President Trump had called for a cap of $100,000 in itemized deductions for single filers up to a $200,000 cap for married filing jointly. People with high out-of-pocket medical expenses (currently amounts beyond 7.5 percent of adjustable gross income), for example, would lose that option to reduce their taxable income. In addition, the opportunity for large charitable contributions and mortgage interest deductions may be impacted. There was also discussion during President Trump’s campaign that all personal exemptions and head-of-household status would be eliminated, but all of these potential deductions are expected to undergo discussion in committee.

Tax Planning Changes for Individuals

My standard guidance to clients is to look at their own individual tax situation and continue to leverage opportunities that range from tax-deferred savings to keeping track of potential itemized deductions. If a major event has occurred or is on the horizon this year, talk to your CPA about its potential tax impact under the current tax code.

Ultimately, consider your business goals and planning for investments or equipment purchases. Consider the current equipment expensing and bonus depreciation rules, the time frame for which your company will need the equipment, and your projected profits when making the decision whether to invest this year or next. The same holds true for estate planning. Planning with the guidance of your trusted advisors keeps you and your family in more control regardless of the next version of federal tax legislation.

As soon as we see some actual legislation from the Hill, there may be more to discuss for you or your company. Think of Cornwell Jackson if you are in need of longer-range planning, reporting support or guidance. And stay tuned!

Continue Reading: Today’s Reform and Tax Planning Predictions

Scott Allen, CPA, joined Cornwell Jackson as a Tax Partner in 2016, bringing his expertise in the Construction and Oil and Gas industries, and 25 years of experience in the accounting field. As the Partner in Charge of the Tax practice at Cornwell Jackson, Scott provides proactive tax planning and tax compliance to all Cornwell Jackson tax clients. Contact him at Scott.Allen@cornwelljackson.com or 972-202-8032.

Posted on Nov 1, 2017

Corporate Tax Reform

In the new tax reform bill, the framework proposes a 20 percent corporate tax rate, down from 35 percent, as well as a top rate of 25 percent for pass-through income. This change, if passed would particularly benefit small business owners and sole proprietorships, but provisions may be put in place to prevent certain service providers or wealthy business owners from converting compensation income to profits that would be taxed at a lower rate.

One proposed change that makes a lot of sense for business owners is elimination of the estate tax. For anyone who has an estate valued at more than $5.49 million (as of 2017) and wants to leave an inheritance to anyone beyond their spouse, that money is taxed at a fairly steep maximum federal rate of 40%. Fortunately for Texans, there isn’t an additional state inheritance tax, since that tax was eliminated in 2015. Because taxpayers have already paid tax on income gained over their lives, opponents consider the federal estate tax to be double taxation.

Some of the business owners particularly affected by the estate tax are ranchers and farmers, whose assets are not liquid but tied to the value of their land. It is not difficult to go beyond $5 million in estate value for several thousand acres of land. Families have been forced to sell their land to pay the tax.

There is some mention of the estate tax being replaced by a carryover basis rule as well as elimination of the generation-skipping transfer tax. This is one change that may have bipartisan support.

Business expensing

Many changes to business incentives are proposed in the tax framework, from elimination of the Domestic Production Activities Deduction (DPAD) to modernizing industry-specific tax breaks to reflect economic reality. If a maximum 20% corporate tax rate is attained, it may make sense to eliminate DPAD and any special incentives that allow only certain businesses to reduce their tax impact even further.

There will be considerable planning opportunities for changes to bonus depreciation or first-year expensing. A proposed 100 percent bonus depreciation for five years starting in 2017 may accelerate investments in property or equipment, but such investments should still make logical sense for the business. In addition, if a business elects to deduct or expense investments rather than capitalize and depreciate, this will result in reduced deductions and higher taxable income in future years. On the face, it seems like an easy analysis, but each business situation will be different.

Repatriation of Profits

Within the tax framework, businesses would be encouraged to bring profits back from foreign subsidiaries and reinvest them in U.S. assets as well as reshoring their headquarters. A one-time 10 percent tax on non-repatriated money has also been proposed. Currently, unless they are structured properly, companies with business outside the U.S. are taxed at the normal corporate tax rate. The new framework offers a reduced tax rate for U.S.-based businesses, likely intended to increase U.S. competitiveness with other countries.

Corporate Tax Planning Prediction

For companies, it is too early to tell if a change in business structure is a good move for tax purposes. We recommend that clients sit tight with their current business structure until we have more clarity on how different business structures will be taxed.

Ultimately, consider your business goals and planning for investments or equipment purchases. Consider the current equipment expensing and bonus depreciation rules, the time frame for which your company will need the equipment, and your projected profits when making the decision whether to invest this year or next. The same holds true for estate planning. Planning with the guidance of your trusted advisors keeps you and your family in more control regardless of the next version of federal tax legislation.

As soon as we see some actual legislation from the Hill, there may be more to discuss for you or your company. Think of Cornwell Jackson if you are in need of longer-range planning, reporting support or guidance. And stay tuned!

Continue Reading: Tax Reform 2017 – Changes for Individuals

Scott Allen, CPA, joined Cornwell Jackson as a Tax Partner in 2016, bringing his expertise in the Construction and Oil and Gas industries, and 25 years of experience in the accounting field. As the Partner in Charge of the Tax practice at Cornwell Jackson, Scott provides proactive tax planning and tax compliance to all Cornwell Jackson tax clients. Contact him at Scott.Allen@cornwelljackson.com or 972-202-8032.

Posted on Oct 30, 2017

Tax reform has taken many twists and turns since April. It appears that any iteration of a tax reform bill will be far from business as usual. Simplification of tax rate tiers and nearly doubling the standard deduction have an overall aim of making individual tax filing easier. However, certain provisions for eliminating deductions are a valid concern among both business owners and individuals. There are good ideas that align with historic tax reform, and others that stray far from it. The best course is to look at your own tax situation from the previous year and consider ways to improve it, while sitting tight on tax news from the Hill. It’s only a framework, so far.

What we Know So Far About the New Tax Legislation

Earlier in 2017, our tax experts at Cornwell Jackson were anticipating what to recommend to clients about a possible change in business structure to manage corporate tax impacts. Initially, both the Trump and Republican tax plans proposed a large federal corporate/business tax rate reduction, putting the new rate for C Corps at 15 or 20 percent. It was a key campaign promise, and comments made by President Trump in March regarding a tax reform package emphasized that he wants to lower the overall tax burden on businesses, regardless of business structure.

Moving into the fourth quarter, President Trump is still promising significant tax cuts and simplification of the tax code. The “United Framework for Fixing Our Broken Tax Code” calls for lower individual tax rates under a three-bracket structure, nearly doubling the standard deduction, and a significant reduction in the corporate tax rate. The framework outlines changing the tax treatment of pass-throughs, expanding child and dependent incentives, and eliminating both the alternative minimum tax and the federal estate tax.

According to a report by Wolters Kluwer, a tax reform package moving through Congress under the reconciliation rules would require only a Senate majority. Any tax cuts would likely have to sunset after 10 years. But 10 years is significant to live with any actual changes.

I will attempt to point out proposed impacts to business owners and individuals in this article, along with how such changes align with historical tax reform and what that may represent for the next decade if we see new legislation for the 2017 tax year.

To drill down to a specific area of the tax reform bill, click on a link below.

Ultimately, consider your business goals and planning for investments or equipment purchases. Consider the current equipment expensing and bonus depreciation rules, the time frame for which your company will need the equipment, and your projected profits when making the decision whether to invest this year or next. The same holds true for estate planning. Planning with the guidance of your trusted advisors keeps you and your family in more control regardless of the next version of federal tax legislation.

As soon as we see some actual legislation from the Hill, there may be more to discuss for you or your company. Think of Cornwell Jackson if you are in need of longer-range planning, reporting support or guidance. And stay tuned!

Download the whitepaper: Tax Reform 2017 – How New Tax Legislation Will Affect Businesses and Individuals

Scott Allen, CPA, joined Cornwell Jackson as a Tax Partner in 2016, bringing his expertise in the Construction and Oil and Gas industries, and 25 years of experience in the accounting field. As the Partner in Charge of the Tax practice at Cornwell Jackson, Scott provides proactive tax planning and tax compliance to all Cornwell Jackson tax clients. Contact him at Scott.Allen@cornwelljackson.com or 972-202-8032.

 

Posted on Dec 6, 2016

With Donald Trump as the president elect and Republicans holding a majority in the U.S. House and Senate, GOP tax reform appears likely in 2017. While campaigning, Mr. Trump promised big tax changes. Here’s a digest of his proposals, according to his website.

Individual Tax Rates and Capital Gains Taxes

For individuals, President-elect Trump proposes fewer tax brackets and lower top rates: 12%, 25% and 33% — versus the current rates of 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%. The tax rates on long-term capital gains would be kept at the current 0%, 15% and 20%.

Proposed Rate Brackets for Married-Joint Filing Couples

Taxable Income Rate Bracket
Less than $75,000 12%
More than $75,000 but less than $225,000 25%
More than $225,000 33%

 

Proposed Rate Brackets for Unmarried Individuals

  Taxable Income
Rate Bracket
$0 to $37,500 12%
More than $37,500 but less than $112,500 25%
More than $112,500 33%

The proposed plan would eliminate the head of household filing status, which could prove to be a controversial idea.

President-elect Trump would abolish the alternative minimum tax (AMT) on individual taxpayers.

Itemized/ Standard Deductions and Personal/ Dependent Exemptions

The president-elect’s plan would cap itemized deductions at $200,000 for married joint-filing couples and $100,000 for unmarried individuals.

The standard deduction for joint filers would be increased to $30,000 (up from $12,700 for 2017 under current law). For unmarried individuals, the standard deduction would be increased to $15,000 (up from $6,350).

The personal and dependent exemption deductions would be eliminated.

Child and Dependent Care

Proposed new deduction: The Trump plan would create a new “above-the-line” deduction (meaning you don’t have to itemize to benefit) for expenses on up to four children under age 13. In addition, it would cover eldercare expenses for dependents. The deduction wouldn’t be allowed to a married couple with total income above $500,000 or a single taxpayer with income above $250,000. The childcare deduction would be available to paid caregivers and families who use stay-at-home parents or grandparents to provide care. The deduction for eldercare would be capped at $5,000 annually, with inflation adjustments.

Rebates for child care expenses: The proposed Trump Plan would offer new rebates for childcare expenses to certain low-income taxpayers through the Earned Income Tax Credit. The rebate would equal 7.65% of eligible childcare expenses, subject to a cap equal to half of the federal employment taxes withheld from a taxpayer’s paychecks. The rebate would be available to married joint filers earning $62,400 or less and singles earning $31,200 or less. These ceilings would be adjusted for inflation annually.

Dependent care savings accounts: Under the proposed plan, taxpayers could establish new Dependent Care Savings Accounts for the benefit of specific individuals, including unborn children. Annual contributions to one of these accounts would be limited to $2,000. When established for a child, funds remaining in the account when the child reaches age 18 could be used for education expenses, but additional contributions couldn’t be made. To encourage lower-income families to establish these accounts for their children, the government would provide a 50% match for parental contributions of up to $1,000 per year. Dependent Care Savings Account earnings would be exempt from federal income tax.

Affordable Care Act Taxes

President-elect Trump wants to repeal the Affordable Care Act and the tax increases and employer penalties that it imposes — including the 3.8% Medicare surtax on net investment income and the 0.9% Medicare surtax on wages and self-employment income.

Estate Tax

His plan would also abolish the federal estate tax. But it would hit accrued capital gains that are outstanding at death with a capital gains tax, subject to a $10 million exemption.

Business Tax Changes

The president-elect proposes major changes to the taxes paid by businesses. Trump would cut the corporate tax rate from the current 35% to 15%, but eliminate tax deferral on overseas profits.

Under the proposed plan, a one-time 10% tax rate would be allowed for repatriated corporate cash that has been held overseas where it’s not subject to U.S. income tax under current rules.

The plan would also allow the same 15% tax rate for business income from sole proprietorships and business income passed through to individuals from S corporations, LLCs, and partnerships, which could cause a significant decrease in tax revenues.

Without getting very specific, the proposed plan proposes the elimination of “most” corporate tax breaks other than the Research and Development (R&D) credit. At-risk tax breaks could include unlimited deductions for interest expense and a bevy of other write-offs and credits.

On the other hand, the proposed Trump plan would allow manufacturing firms to immediately write off their capital investments in lieu of deducting interest expense.

What about Congress?

In addition to President-elect Trump’s proposed plan, House Republicans released the “Better Way Tax Reform Blueprint” earlier this year and Republicans in the Senate proposed their own tax plans. These proposals — which in some cases, differ from Trump’s — would make numerous changes to cut taxes and simplify filing. Despite some differences, members of Congress have expressed support for Trump’s plans and have vowed to act quickly.

When Might Changes Happen?

Democrats in Washington are likely to oppose any meaningful tax cuts, and they can attempt to stall things in the Senate where the Republicans won’t have a filibuster-proof majority. However, the Republicans can use the same procedural tactics that the Democrats used in 2010 to enact the Affordable Care Act. It’s possible that Trump’s tax plan (or parts of it) may pass in the first 100 days of his new presidency. If that happens, we could see major tax changes taking effect as early as next year.

Stay tuned.