For individuals and businesses alike, tax reform is a lot to unpack. Even if your clients can wrap their heads around the new rules, they may not know what these changes mean for their wallets. To truly understand the impact of tax reform, it’s helpful to keep in mind the pre-tax reform policies and compare the two sets of regulations.
The major business tax implications your clients need to know include:
- A change in corporate tax rate from a progressive tiered rate, which generally ranged from 15-35, to a flat rate of 21 percent with no corporate Alternative Minimum Tax.
- Newly instated deductions of up to 20 percent for qualified business income for pass-through entities (partnerships, LLCs, sole); but be sure to note that because the provision falls under the individual tax code, it will sunset in 2026 without additional legislative action.
- A tax credit, ranging from 12.5 percent to 25 percent of wages paid in 2018 and 2019, for certain employers that provide paid family and medical leave to their workforce.
- Modifications to the rules for exclusion of employee achievement awards to prohibit items such as cash and gift cards from tax-free status.
- A reduction in the ACA’s individual mandate tax penalty to $0 by 2019. Self-insured employers and insurers are still required to report individuals covered by their plan or face penalties.
- Businesses can no longer make deductions for settlements and costs of settlements related to sexual harassment or sexual abuse if settlements are subject to nondisclosure agreements.
- Businesses no longer get a deduction for contributions to commuting expenses with the exception of cycling cost reimbursement. Employees still receive the tax-free benefit for the previous commuting cost with the exception of cycling – money toward cycling to work is no longer tax-free for the employee.
Individual tax provisions under the tax reform bill sunset in 2026 without additional legislative action. These changes to individual taxes, include:
- An increase in the standard deduction to $12,000 for single filers, $24,000 for married joint filers, and $18,000 for heads of households. In 2017, deductions were $6,350 for single filers, $12,700 for married joint filers, and $9,350 for heads of households.
- The discontinuation of personal exemptions. In 2017, the IRS allowed a $4,050 exemption per family member, including the filer.
- An increase in the maximum child tax credit to $2,000, plus an additional $500 family credit for nonchild dependents. Phaseout thresholds have also been raised to $400,000 for joint filers and $200,000 for singles in 2018. Before tax reform, maximum child tax credit was $1,000, and the phaseout thresholds were $110,000 and $75,000 for joint and single filers, respectively.
- A decrease in the mortgage interest deduction threshold to $750,000. Previously, the mortgage interest deduction threshold was $1,000,000.
- A doubling of the estate and gift tax exemption to $10 million.
- A change in moving expense deductions. While civilians used to be able to deduct moving expenses, now only members of the armed services can make this deduction.
- The discontinuation of a special rule which allowed recharacterization of individual retirement account (IRA) contributions between Roth and traditional IRAs.
- A reduction in the threshold for deducting qualified medical expenses to pre-Affordable Care Act levels (7.5 percent) for 2017 and 2018 only.
Changes made to the IRS withholding tables also play a role in how tax reform impacts your clients:
- Before tax reform, the withholding rate on supplemental wages for $1 million or less was 25 percent. It is now 22 percent.
- Before tax reform, the withholding rate on supplemental wages over $1 million was 39.6 percent. It is now 37 percent.
- Before tax reform, the back-up withholding rate was 28 percent. It is now 24 percent.
- Before tax reform, the amount to add to non-resident alien wages was $2,300 annually. It is now $7,850 annually.
- Though they were eliminated, personal allowances were retained in the new withholding tables to work with the current Form W-4. Employers will need to factor these allowances in when applying the withholding.
The impact of tax reform is still evolving, stay up-to-date with the latest tax reform developments impacting both employers and employees at www.paychex.com/articles/compliance/tax-reform. The AICPA also has a host of tax reform resources at www.aicpa.org/taxreform.
Mike Trabold is director of compliance risk for Paychex, Inc. Paychex is a leading provider of human capital management solutions for small- to medium-sized businesses.
