Is the Tax Cuts and Jobs Act Supporting the Decision to Have More Children?

Last winter Congress passed the Tax Cuts and Jobs Act (TCJA) in an effort to lower income taxes for virtually all taxpayers. As a result, most Americans are expecting larger refunds this spring. Supporters of the bill believe this will help improve the economy, while others believe it is fiscally irresponsible. Whatever your belief is, it is certainly changing the way tax returns are prepared and enhancing certain credits.

One of the major changes with the Tax Cuts and Jobs Act, is that the deduction for personal exemptions has been suspended. This is often a significant benefit for taxpayers and families with children. The new tax code however, is increasing the child tax credit up to $2,000 per child under Code Section 24(h)(2). Under pre-Act law, the child tax credit provided taxpayers a benefit up to $1,000 per child. The pre-Act law also phased out taxpayers by $50 for each $1,000 of adjusted gross income (AGI) over $75,000 for single filers, $110,000 for married filing joint filers, and $55,000 for married individuals filing separately. These phase out thresholds often kept many taxpayers from receiving this credit. Thankfully, under the new Tax Cuts and Jobs Act, the phase out thresholds have increased to $400,000 for married taxpayers filing jointly, and $200,000 for all other taxpayers. These child tax credit modifications will certainly benefit more taxpayers with qualifying children.

Another benefit of the Tax Cuts and Jobs Act, to help combat the suspension of personal exemptions, is the non-child dependent credit. Under Code Section 24(h)(4) there will be a partial credit worth up to $500 for each dependent of the taxpayer, that is other than a qualifying child. This will likely help taxpayers who have been providing qualifying relatives more than half of their annual support.

These are two small changes included in the Tax Cuts and Jobs Act that could have the potential to reduce your 2018 taxes. The TCJA will certainly impact every taxpayer’s 2018 tax return in one way or another.

If you would like to review what implications the TCJA could have on your 2018 tax return, PFBF CPAs is happy to assist you with your questions. Please don’t hesitate to stop by one of our offices: 259 Front Street, Bath or 46 First Park Drive Oakland.

Nick Deblois is a Staff Accountant at Perry, Fitts, Boulette & Fitton CPAs. He works closely with other senior staff members of the firm, honing his talents regarding tax and accounting matters. He can be reached at  207-873-1603.

The (potential) 20% Deduction Business Owners Should Understand

Last December, one of the biggest (real news) headlines was the drastic tax reform working its way through the legislative process. The Tax Cuts and Jobs Act (TCJA) was officially signed into law by President Trump on December 22, 2017 and it represents the most comprehensive tax reform in decades.

The more dramatic changes have been well publicized, but as with much of the Internal Revenue Code, some of the logistics are hard to comprehend. Arguably the most reformative of these changes is the Section 199A Deduction for Qualified Business Income. The Qualified Business Income Deduction (QBID) exemplifies congresses intent to organically aid in the growth of business. Staying consistent with the right’s traditional nod to trickle-down economic theories, the current administration is betting that increased liquidity via tax savings will be reinvested in capital assets and hiring.

QBID is a “below the line” deduction on Form 1040 that is available to sole proprietors and recipients of pass-through income (i.e. from S-Corporations and Partnerships). It is likely that part of the initiative behind QBID was to even the playing field for businesses not operating as C-Corporations. Under the TCJA, C-Corporations now enjoy a flat 21% tax rate; with individual rates being as high as 37%, a business operating as a C-Corp could otherwise have advantages over S-Corps or Partnerships whose owner(s) reside in the top tax bracket. It seems to this author that the extension of the corporate tax break to small business owners not only fit the republican economic agenda, but it also is likely to have helped proponents of the bill increase public support amongst business owners.

To narrow the gap in tax rates between large corporations and small businesses, congress decided to allow individuals a deduction on their personal tax returns equivalent to 20% of QBI (qualified business income). Assume for purposes of an illustration that the only item on a single filer’s tax return is $150,000 of business income and that they take the standard deduction. In 2018 this nets to $138,000 of taxable income and $27,410 of tax. Now consider all things the same, except the $150,000 of business income is qualified within the confines of QBID. In the later scenario, the taxpayer’s taxable income nets to $110,400, with tax of $20,786 and a net tax savings of $6,624 because of the new deduction.

As with most tax breaks in the Internal Revenue Code, there are however caveats, and they are complicated. There is an income threshold for example: single filers with taxable income above $157,500 (or $315,000 for joint filers) will need to consider their employees’wages and the company’s depreciable assets into their QBID calculation, as their deduction will be limited by one of these two factors.

Further, a taxpayer is subject to a complete phase-out of the deduction if he or she works in one of the few service industries specified by congress “where the principal asset is the reputation or skill of one or more of its employees.” Services in the fields of health, law, accounting and consulting are a few that fall into this category. If the AGI of a professional in one of these fields exceeds $207,500 (or $415,000 if they file joint) then the QBID escapes them entirely.

There was in fact a bit of “fake news” surrounding the legislation in regards to how the Tax Cuts and Jobs Act was going to “simplify” the tax code. For some taxpayers, it probably did, the increased standard deduction will mean that many taxpayers will no longer need to itemize deductions. For other taxpayers however, specifically those who own a business, the tax environment got more complicated. The word “potential” is the best way to describe the QBID. Taxpayers whose income typically falls near the thresholds are going to have to be meticulous in how they structure things both at the entity level and on their personal returns to maximize the potential QBID. Diligent tax preparers are working with their clients to navigate the regulations and some interesting strategies are being passed around the CPA community. In the end it is going to come down to effective tax planning. Far too often taxpayers inadvertently omit deductions they would otherwise be entitled to had they planned properly. The QBID has potential to save a lot of people a lot of money, they just need to do their homework.

John Massey is a Senior Accountant at Perry, Fitts, Boulette & Fitton CPAs. He helps individuals and businesses with tax planning preparation and works on compiled and reviewed financial statements for businesses. He can be reached at 207-873-1603.