TCJA provides new opportunities for planning

January 7, 2019

By Sidney Kess at The CPA Journal on December 2018

The IRS reports that approximately 70% of taxpayers have taken the standard deduction on their federal income tax return in recent years. Under the Tax Cuts and Jobs Act of 2017 (TCJA), that figure may rise to over 90%, according to the White House Council of Economic Advisers. The TCJA increased the standard deduction and reduced taxpayers’ ability to itemize, making the standard deduction relatively more appealing. Logically, the more people take the standard deduction, the lower the demand for professional tax preparation.

Furthermore, tax preparation services have spread from CPA firms to financial advisors, insurance professionals, and individuals using specialized software. Altogether, tax preparation is likely to become a less profitable activity for CPA firms.

The good news is that, because of the TCJA and other current developments, new potential sources of revenue are opening up for CPAs. Some CPAs already have done well by offering specialized expertise in estate planning for IRAs, or in college funding. Below are some possible areas where CPAs and staff members might be able to offer valuable assistance to particular individual and business clients.

Business Entity

Individuals who are business owners can choose between pass-through entities (including sole proprietorships, S corporations, partnerships, and LLCs) or regular C corporations for their entity choice. Pass-throughs now offer the possibility of a qualified business income (QBI) deduction of up to 20% of reported income under the new Internal Revenue Code (IRC) section 199A. There may, however, be QBI deduction limits for high-income individuals and for some types of businesses.

C corporations still have the disadvantage of possible “double taxation” on corporate and personal income, but the corporate tax rate has been reduced to a flat 21%. The calculations involved in comparison can be complex, but CPAs can offer true value by learning the fine points of the new QBI rules and applying them to clients’ situations. Indeed, this area so important and complex that a large enough CPA firm might consider designating a specialist to help clients make informed decisions.

Relocation

The TCJA limited state and local tax (SALT) deductions to $10,000 on single and joint tax returns. For many, large SALT payments will become much more expensive after tax. As a result, some individuals and business owners may be interested in moving to other jurisdictions, where SALT outlays will be lower.

For such taxpayers, CPAs could develop a specialty of cost comparison after a hypothetical relocation. How much would actually be saved after SALT obligations are reduced? Would other costs offset the savings? How practical would a move be, considering work and family situations? Should people tethered to a job in a high-tax area start to plan now for a move after retirement?

SALT Workarounds

Many states with above average income or property taxes have adopted measures designed to lessen the impact of the $10,000 cap on SALT deductions for their residents. For example, taxpayers may be able to contribute to a state-sponsored charity, taking a federal tax deduction in return for a credit against state income tax.

Click here to continue reading.

View all News