Neal, will my taxes really go down?
The recently passed tax cuts have generated a lot of phone calls from Bach, James, Mansour & Company clients. Unfortunately, we don’t have the answer to the main question, “Will my taxes go up or down?” More details are below, but the full tax impact can’t really be determined until the state of Georgia determines whether to make any state tax code adjustments. Georgia isn’t the only state in this situation.
Individual and business tax Q&A
Here are the top 5 questions that I’ve been asked by individuals and business owners. Below that, I’ve included details on why Georgia’s legislative decisions, if any, could have a major impact on 2018 tax returns filed next year. Note that these tax cuts apply to 2018 taxes, not 2017.
- What happened to personal exemptions? They are gone like the dinosaurs. Today, you’re allowed to claim $4,050 per household member. The loss of this exemption is offset, somewhat, by the doubling of the child tax credit (to $2,000) and nearly doubling of the standard deduction to $24,000. That begs the standard vs. itemized deduction question…
- Will I still need to itemize deductions? This will literally have to be determined on case-by-case basis after the state of Georgia makes any applicable tax law changes (see below). Miscellaneous deductions, like brokerage fees, are gone. That, along with the higher family standard deduction, increased family phase-out level of $400K, and state/local tax itemized deduction limit of $10K, will probably mean that fewer people will itemize deductions.
- What happened to the Alternative Minimum Tax? AMT is still there, but the exemption phase-out doesn’t start until $1MM of joint income, so fewer people should be impacted.
- Does the new 21% corporate tax rate apply to all businesses? There are still exceptions for “professional” entities, like doctors, lawyers, and CPAs. Owners of these pass-through entities will receive a 20% deduction on earnings, but still pay individual tax rates. There are more details, and the deduction starts phasing out for joint filers who earn more than $315,000. For some reason, architects and engineers are no longer considered “professional companies” – good news for tax purposes!
- Should I be thinking about changing my business entity? Business owners have been asking if they should convert their S Corporations to C Corporations to take advantage of the new 21% corporate tax rate. It may be worth the effort, especially if you retain money in your company, but you’ll definitely want to consult first with your tax advisor.
Georgia state tax impact – the great unknown
In Georgia, and some other states, the legislature will have to make some decisions before we can determine the true impact of the federal tax cuts. The current Georgia tax law requires anyone filing federal taxes with the standard deduction or itemized deductions to do exactly the same thing in Georgia. You could save on federal taxes, but then lose that savings on state taxes.
For example, let’s say you can reduce your taxes by taking advantage of the higher federal standard deduction. Based on current Georgia tax law, you would have to take the paltry $2,700 state standard deduction and lose all other state deductions. If no changes are made, Georgia will generate a lot more tax revenue – an estimated $3.6 billion in the next 5 years – and have some pretty upset residents. Hopefully, our legislature will make adjustments.
Nothing is certain, except death and taxes
The only thing permanent about these tax cuts is the 20% corporate rate. Everything else reverts back in 2026 unless new laws are passed.
We’re in the home stretch to finish up 2016 tax season (January 31 deadline), and then we’ll get to work on 2017 tax season to meet the April 17 deadline. As we learn more about 2018, we’ll continue to share information. If you have questions, please give us a call or schedule a meeting.
Neal Bach, CPA
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