The Tax Cuts and Jobs Act (TCJA), enacted in 2017, brought significant changes to tax laws for both individuals and businesses. These changes included adjustments to tax brackets, new rules governing deductions and credits, and a reduced corporate tax rate. To optimize your taxes and ensure compliant returns, it’s important to understand how these shifts impact your business and personal tax situation.
Our CPAs take a closer look at financial planning in this regard.
The TCJA’s Impact on Taxation
For individuals, the TCJA introduced lower rates across different income brackets, simplifying the filing process for many. However, it also capped the state and local tax (SALT) deduction at $10,000. This change significantly impacted taxpayers in high-tax states like New York, California, and New Jersey, where property taxes and state income taxes often exceed this cap. As a result, many individuals in these states are unable to deduct their full state and local tax payments, leading to a higher taxable income and, ultimately, a larger tax bill.
Businesses benefited from a substantial reduction in the corporate tax rate, dropping from 35% to 21%. However, this relief was accompanied by changes, such as limitations on deductions for interest expenses and new restrictions on carrying forward net operating losses.
These adjustments require both businesses and individuals to reevaluate their tax strategies to ensure they are taking full advantage of the new rules while staying compliant.
Tax Planning for Individuals
As an individual the goal is always to keep more money in your pocket, and the TCJA’s adjustments allow you to do that. Consider the following tax-saving strategies:
- Income Shifting and Estate Planning: You can transfer some of your income or assets to family members in lower tax brackets to help you save on taxes. While it carries some risks, the TCJA allows you to transfer up to $13 million in estates and gifts tax-free per individual as of 2024. Back in 2018, the Act raised this exemption from $5.49 million to approximately $11.18 million per individual. To maximize these benefits, consider gifting income-generating assets like stocks or using trusts to control how and when your assets are distributed.
- Maximizing Deductions: You can benefit from grouping deductions like charitable donations and mortgage interest into one year. This way you might surpass the standard deduction and be able to itemize your deductions instead. Itemizing allows you to deduct more from your income, which can lower your overall tax bill.
- Tax-Efficient Investments: Consider investing in retirement accounts like 401(k)s or IRAs, including Roth IRAs, which allow you to pay taxes now and enjoy tax-free withdrawals later. Additionally, explore tax-free or lower-tax income options like municipal bonds, and adjust your salary structure to take full advantage of the TCJA’s lower rates.
Tax Planning for Businesses
Just as individuals can reduce their tax burden with the TCJA, your business can too. Use these tax-saving strategies to do so:
- Optimize Pass-Through Deductions: Owners of sole proprietorships, partnerships, and S corporations can deduct up to 20% of their qualified business income to reduce their taxable income.
- Select the Business Structure For Your Needs: This is a key part of your savings strategy.
- Sole proprietors and partnerships can benefit from the pass-through deduction but might face higher self-employment taxes.
- S corporations also benefit from pass-through taxation and can help reduce these taxes by paying a reasonable salary to the owner.
- C corporations, while enjoying the lower tax rate, might deal with double taxation – first on corporate profits and again on dividends paid to shareholders. It is important to consult with a tax expert to assess the entity structure best suited to your needs.
- International Tax Planning: If you run a multinational business, the TCJA offers great opportunities for tax relief, including a reduced tax rate for foreign earnings. Additionally, you may qualify for deductions on certain types of foreign income, such as the foreign-derived intangible income (FDII) deduction, which applies to income earned from exporting goods or services. By planning carefully, you can take advantage of these.
Compliance and Regulatory Considerations
While the TCJA offers an opportunity for significant tax relief, it also introduces several complexities which include the limitations businesses face when it comes to interest deductions. This requires careful planning.
Additionally, because tax laws are always evolving, future changes could impact your tax strategy and compliance.
At Fusion CPA, our experts stay abreast of tax law changes to ensure your tax planning strategy is both compliant and optimized for future success. Contact us today!
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This blog article is not intended to be the rendering of legal, accounting, tax advice, or other professional services. We base articles on current or proposed tax rules at the time of writing and do not update older posts for tax rule changes. We expressly disclaim all liability regarding actions taken or not taken based on the contents of this blog as well as the use or interpretation of this information. Information provided on this website is not all-inclusive and such information should not be relied upon as being all-inclusive.