Business owners, help avoid tax surprises this spring
As 2018 winds down, you may wonder if and how tax reform (the 2018 Tax Cuts and Jobs Act) will impact your filing and returns—for both your business and your personal income—come tax time in April.
“I think there will be a lot of surprises in the spring,” says Scott Van Wyngarden, a Principal® retirement/income tax consultant.
While the average W-2 filer should have it easy (self-prep systems such as TurboTax should work fine), business owners would benefit from a conversation with their advisor and a tax professional. We dig into a few details about why.
Some small businesses may get surprised by a tax hike
Many small businesses will likely benefit from a 20% tax deduction on qualified income. But it may depend on your business.
Service firms such as lawyers, doctors and accountants may not feel relief from the tax break if their overall taxable income (not just business income) is too high—$157,500 for singles or $315,000 for married couples filing jointly.
Those pitfalls must be balanced with other features of tax reform that can provide a boost to business.
“Like most things that are related to taxes,” says Heather Winston, a client relationship director at Principal, “there’s a yin and yang to decision-making.”
Work with your advisor and a tax professional to crunch the numbers. For example, even though a C corporation tax rate of 21% may look favorable compared to, say, a personal rate of 37%, you can’t be certain you’ll reap the benefits without making all the calculations.
What’s more, remember that some provisions affecting individuals and businesses other than C corporations are scheduled to end after 2025.
Beyond your business, simple steps you can take
It’s not too late to check your personal withholdings. If those are out of alignment, even a tax savings could result in an unpleasant lack of refund or even a bill next spring. Ask your tax professional or consult the calculator at irs.gov to help figure out your proper withholding amount.
And be sure to maximize your retirement savings. That’s one of the easiest ways to reduce taxable income, even for small business owners.
Charitable giving gets more complicated
The standard deduction threshold nearly doubled to $12,000 for individuals and $24,000 for couples—which means fewer people may choose to itemize and deduct charitable donations.
There are still a few ways to give to charity—and get a tax benefit.
Those age 70½ and older may want to consider a qualified charitable distributions (QCDs), paid directly to charities from their IRAs. These can count toward retirees’ required minimum distributions (RMDs) but aren’t taxed as income. So, it can be a tax savings even without the added benefit of itemized charitable deductions.
Some taxpayers may opt for donor-advised funds, where they can control the withdrawals.
“Until we’ve been through a cycle or two,” says Mark West, assistant vice president of Advanced Solutions at Principal, “everybody’s going to be trying to sort out what this really means and what’s the best way to handle it.”
For more tax info, check the irs.gov website.
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