Understanding the Recent Tax Law Changes

Yes–Tax Law Changes Can be…Fun…Complicated….Painful…Beneficial?

New tax legislation gets covered by the popular press almost like a sporting event. Winners and losers.  Certain provisions are summarized and get a lot of news, other key provisions are barely reported on.  It’s like the old joke:  A local news station reported on Moses coming down from the Mount.  “Moses came down from the Mount today. He was carrying 10 amendments–the top 5 are…”

This is by way of saying that it is difficult to cover this type of tax legislation in a short blog post. At this point, there’s been little time to completely analyze the final legislative language. As the fog clears we will post additional thoughts on many of the elements of the tax act and impact on different programs.

The Basic Facts

On December 20, 2017 the House of Representatives passed the Tax Cuts and Jobs Act of 2017*, which was the final vote in Congress.  The legislation is now moving to the White House for the President’s signature. If you have been following the news about the relatively short journey this massive tax legislation has taken through Congress, you are probably aware of many of the provisions that have been reported by the popular press.  For instance:

  • Changes to the personal income tax rates (temporary – scheduled to sunset 2026)
  • Increases in personal standard deduction (temporary – scheduled to sunset 2026)
  • Elimination of personal exemptions (temporary – scheduled to sunset 2026)
  • Elimination or changes to many personal itemized deductions (including State and Local Taxes) (temporary – scheduled to sunset 2026)
  • Creation of a new pass through entity special tax rules on so called business income (temporary -scheduled to sunset 2026)
  • Reduction of C Corporation tax rate
  • Limits on business interest deductions
  • Estate tax – increase in the unified credit (temporary – scheduled to sunset 2026)

Analyzing the Changes – First Impressions

  1. Complicating an already complicated tax code. The Tax Cuts and Jobs Act of 2017 was not an effort in simplifying the federal tax system. It has added new concepts that will take some time to analyze (for instance the impact of the business pass thru tax rules). Watch for our Deep Dive on Tax Reform posts coming over the next few weeks.
  2. Yes, we have sunset provisions on a significant portion of this legislation. On January 1, 2026, impacted provisions (such as the changes to personal Taxes and Estate and Gift Taxes) will revert to current tax law. What does that mean? The tax rates return to 2017 rates, standard deductions go back down, personal exemptions return, itemized deductions go back to 2017 values (adjusted for inflation). Sunset provisions tend to add instability to planning–not knowing what tax rules will apply in 8 years add uncertainty to personal and business plans.
  3. Will this Tax Act really increase the deficit by $1 Trillion, $1.5 Trillion, or more (or less)? No one really knows. The nonpartisan Joint Committee on Taxation found the bill will add $1.4 Trillion to the deficit. Is this important?  Whatever your political stripes–huge increases in the deficit and the costs associated with Federal Government borrowing–can have a significant impact on the economy, on Federal spending on vital services and on the potential need to raise taxes later to address the deficit. This situation is something to watch closely.

What to Do Now

It will take a little bit of time to digest the details of this tax act. We will be sending out a series of posts that will spell out our growing understanding of the impact of the Tax Act and will share case studies that will shine a light on opportunities. Stay tuned…more to come.

* The official name of the new tax law is much longer than “The Tax Cuts and Jobs Act of 2017,” and was changed last minute because of parliamentary rules. For simplicity, we will continue to refer to the legislation as The Tax Cuts and Jobs Act of 2017.