There are two widespread misunderstandings about the current tax reform: My taxes are going to be higher this year [or] my taxes are going to be lower this year. I know it seems illogical that both of these statements could be incorrect, but they certainly could be. Yet there is only one thing that is certain about this “simplified” tax code: It is anything but simple. Unfortunately a large number of people will learn they can either plan now or pay later only when it is too late. Will that be you?
#1 - If you own a business… Not every business will see a decrease in taxes—even small businesses. For instance, deducting entertainment expenses is no longer an option. How many times have you taken a client or prospect to lunch, written off a hunting trip or entertained clients? You will now pay tax on every penny of this. And believe it or not, there are more changes just like this that you need to be aware of.
#2 - If you are a Sole Proprietor, Partnership, S-Corporation, LLC, real estate owner... This may sound redundant with business owner… and it is! You may have heard that you will get to deduct 20% of your business’ income. Well, that may be true… and may not - you may get to deduct 0%! It depends on the type of business, type of income, overall taxable income, W-2 income, employees’ W-2 income, and qualified property. You need to know what you don’t know here.
#3 - If you are a farmer or rancher… My eyes literally crossed reading how taxable income is calculated for the farmer or rancher. You may not have had to pay taxes ever - and could owe six figures in taxes this year. Or you may normally go on a green paint spree at the end of every year just to bring your taxes down and won’t need to buy any equipment this year. Furthermore, choosing capital gains treatment over ordinary income may cost you and trade-ins on equipment may bite back. Bottom line: you may need tax planning worse than anyone on this list.
#4 - If you itemize your deductions… especially if your state income taxes or property taxes are over $10,000. There were several deductions that disappeared, some that were limited and some that were drastically increased. Unfortunately or fortunately, you can’t just look at the deductions alone to know whether you will pay more or less this year.
#5 - If you need to save more for retirement…What is it that you typically do with a tax refund? Whatever your answer is, I bet it isn’t “save it.” Don’t wait until 2019; let tax reform help you to take care of the old person you will be some day beginning right now.
Tax reform was designed to boost the economy by lowering taxes for everyone. But you may not get to take advantage of it unless you do a little planning. Start today!