Is it just me, or does anyone else feel caught in a holding pattern when it comes to taxes? The year is almost over, next year’s tax season will be upon us before we know it, and we’re all still wondering how tax changes will impact us.
While I don’t have a crystal ball to peer into, if you look for trends in the news that have come out the past few months, you can make some assumptions about what to keep an eye on. Here are two popular tax reform initiatives to pay attention to:
Income tax rate changes
A consistent theme is to “lower income tax rates” for both individuals and businesses. But, when you say “lower income tax rates” and you don’t also say “cut spending,” you have to make up the lost revenue from the rate cut somewhere – after all you still have to pay for the same stuff.
To do this, the theme has been to cut currently available tax deductions, as well as the tax rate. Whenever you cut deductions some people will be hit harder than others. Unfortunately for us, the Ohio small business owner may be one of those groups.
State and local tax deductions, as well as other itemized tax deductions, are on the chopping block. Because Ohio has a relatively high tax rate when state, city and property taxes are combined, the loss of the state and local deduction could hit Ohio individuals a bit harder than in other states.
Enhanced standard deduction
A bigger (err, double?) standard deduction sounds great – how could it not be? But for people who are considering buying their first home or making charitable contribution, or who rent homes, sell homes, or manage charitable organizations, this initiative could prove to be a more of a curse than a blessing.
For example, consider those who are trying to justify the leap of buying their first house, what if they got no tax benefit for their mortgage interest and real estate taxes? For many buyers of smaller homes, including retiring baby boomers, the enhanced standard deduction may do just that.
The larger standard deduction may also come at a cost of limitation or elimination of the charitable deduction for many individuals – after all if the standard deduction is bigger than the itemized deductions (which includes charitable deductions) why would you take the itemized deductions? With little or no tax benefit, will those people give less? Will charities find that a segment of donors just disappears?
How Should I Plan For The Year Ahead?
As we go to print, there’s still so much unknown in the tax world. We can only make assumptions based on information that has come out in the past few months about what the federal government is considering. And we can only plan for as much as we know.
That being said, here are some recommendations:
- Don’t be fooled by “good news!” Unfortunately, everything that is under the guise of “good news” isn’t always good for you. Pay attention to the smaller changes that might make more impact to you than a general rate cut. The reduction of your tax rate by 5 percent might not be worth the loss of that deduction.
- Don’t panic. Stay informed. One of the best things you can do as we move into the New Year is remain calm and stay up-to-date on the latest developments. Don’t make any sudden financial decisions until you fully understand how any tax changes will impact you and your business.
- Stay close to your financial advisor and reach out to him or her with questions or concerns. There are a lot of moving parts when it comes to tax reform. And there’s a lot to keep track of. Be sure to keep in close contact with your financial advisor as they can help keep you informed of any tax changes that may impact you and your business. They can run the numbers for you and let you know what a new set of rules next year might bring.
Our team is committed to keeping you updated on any changes that may financially impact you and your business. To stay up-to-date, be sure to check out www.reacpa.com for timely, relevant articles on the latest developments.
By Joe Popp, JD, LLM (Dublin office)