On December 22, 2017 the President signed the new tax bill into law, making sweeping changes to the federal tax code for corporations, small businesses and individual taxpayers alike.
For many low and moderate-income earners, the new law will reduce complexity – eliminating the need to itemize. And that is a significant benefit.
But ensuring taxpayers understand and take advantage of tax provisions that affect them will require an ongoing and close collaboration between government and the tax preparation industry. Rolling out such a widespread set of changes will require extra work – both to clarify the law’s intent and to determine who is eligible. Consider some of the examples below.
The law includes a variety of new tax breaks for small businesses and taxpayers, but there is more work to be done before people can determine exactly whether they qualify for these new provisions in the code. That’s because many of the changes in the new tax law still require clarifying Internal Revenue Service (IRS) guidance before businesses and taxpayers can begin to take advantage of them. As with all major tax legislation, most experts believe Congress will also have to pass additional legislation this year to modify or amend certain sections of the tax overhaul in order to fulfill the sponsors’ original intentions.
The IRS began providing guidance on specific provisions of the new tax plan within days of it being signed into law. The IRS has issued numerous announcements of new rulings or guidance for taxpayers. Still, given the scope of changes, taxpayers have many questions and lack of clarity around things like the new withholding provisions.
In a recent public letter to the IRS, the Association of International Certified Professional Accountants (AICPA) identified 39 sections of the bill that they believe require IRS guidance or clarification. Most of the sections called out by AICPA affect businesses, and large businesses at that. But some provisions also have considerable consequence for millions of individual taxpayers.
For example, challenging parts of the tax code are the changes relating to small business “pass through” income and the modifications for taxpayers with dependent children.
The pass through deduction is intended to reduce the taxes on small business owners and move them toward parity with their large corporation counterparts who saw their maximum tax rate reduced to 21 percent.
Since the income from most small businesses “passes through” to their owner’s personal income tax return, that income is subject to a new maximum withholding of 37%. By allowing qualified small business owners to deduct up to $20,000 of their income, the law is expected to reduce the maximum personal rate of eligible small business owners by several percentage points. The challenge that remains is figuring out which businesses qualify for this important tax break and the IRS has promised guidance in the very near future.
For individuals with dependents or qualifying children, understanding and planning for the modifications to eligibility for credits remains complex. Eligibility depends on taxpayers’ actual incomes and factors such as dependent living arrangements, which can change over the course of the year. Since many of these taxpayers rely on the tax refund for essential purchases like food, housing and healthcare, the sooner they have a clearer picture of their eligibility for benefits the better.
For our part, Intuit has been communicating with our customers as well as the broader public about these changes and the recent IRS guidance. We stand with the rest of the tax preparation community – poised to help our customers prepare and file accurate tax returns. This is an example of government-industry partnership that will matter for all taxpayers.
The reality is that a tax bill with sweeping changes requires all parts of the tax ecosystem to take extra measures to understand the new rules and make a special effort to inform and educate taxpayers so they can meet their obligations and realize their benefits in the year ahead with greater confidence and reliability.