The more tax laws change, the more they don’t stay the same. That’s the reality of the Tax Cuts and Jobs Act of 2017 (TCJA). Changes brought about by this extensive tax law overhaul have endowed taxpayers with new opportunities to reduce their tax liability while revising or eliminating some previously existing methods to accomplish that goal.
Along with lower tax rates to individuals and businesses, and other changes meant to spur the economy, are these TCJA-related subjects:
A 20 percent deduction for pass-through business operators:
About 95% of U.S. businesses are pass-through entities: S corporations, sole proprietorships, and partnerships. Pass-through business owners pay their taxes when they file their personal tax returns. The TCJA created a 20% deduction for pass-through businesses. Any amount qualifying for the deduction is taken off gross income. A salary paid directly to an owner does not qualify for the deduction.
Therefore, taking a distribution rather than a large bonus at year-end is generally a better strategy, as bonuses expose the money to higher taxation levels.
The entire charitable and nonprofit world is waiting to see the full-year impact on charitable giving of the increase in standard deductions to $12,000 for individuals, $18,000 for heads of households, and $24,000 for married couples filing jointly. Tax deductions are only allowable for such contributions if the return is itemized and they exceed the standard deduction.
This standard deduction increase is seen by some financial observers as a potential disincentive for people to engage in charitable giving, in that it reduces the need or motivation to itemize.
Perhaps to not deter high-amount gifts, TCJA eliminated the itemized deduction phase-out for high-income taxpayers ($313,800 married, $287,650 head of household and $261,500 single taxpayers), allowing taxpayers who itemize to deduct every dollar of charitable contributions. Large donors also can offset up to 60% of taxable income, up from 50%.
Less SALT (state and local tax deductions) on the table:
SALT deductions are limited to $10,000, which include sales, state income and real estate taxes.
GILTI is charged with raising taxes on foreign-owned company stock ownership:
An increasingly interconnected world means Americans are increasingly investing in foreign-owned corporations. The GILTI (global intangible low-taxed income) tax regime assesses taxes currently on income earned in these low-tax jurisdictions. For investments in other jurisdictions, the U.S. is moving to a territorial-based system. There are various strategies to deal with this tax-increase sentence by GILTI, all of them complex and requiring substantial strategic thinking.
Paying taxes is required; however, taxpayers have every right to reduce their tax liability to the maximum legal extent. Four examples of tax-affected subjects have been shared here. There are innumerable others.
An unchanging fact in the ever-changing tax world is that a qualified tax adviser or specialist is your best defense against paying too much, and too often.
This article was originally published in the Knoxville News Sentinel.