Planning for the Tax Cuts & Jobs Act (TCJA)

Planning for the Tax Cuts & Jobs Act (TCJA)

At this point, most people are probably aware that there are some MAJOR tax changes happening in 2018.  The Tax Cuts & Jobs Act of 2017 (“TCJA”) was signed into law on December 22, 2017.  While everyone was eating Christmas dinner and ringing in the new year, tax attorneys and accountants were pouring over this new law, which enacted the most sweeping changes to our tax code in over 30 years.

Here is the good news:  despite all the hand-wringing and hysteria you may have heard in the media, the new tax law does actually benefit most Americans.  In my opinion, the biggest winners are middle class to upper middle class taxpayers, and entrepreneurs/business owners in particular.  At this point, I have analyzed and run projections for hundreds of clients.  Out of all of those, I had maybe one or two how were not benefiting on some level from the tax law changes – and even in those cases, it was nominally so.  Effectively, those people weathered about the same under the old law and new law, they just weren’t realizing huge benefits like some families.

We have spent the spring and summer of 2018 wrapping our brains around the new law and what this is going to mean for us and our clients.  In August, the IRS release long-awaited regulations to support Section 199A, which you may have heard referred to as the “Qualified Business Income Deduction” or “Passthrough Business Deduction.”  These regulations provided some much needed clarity on one of the law’s most substantive provisions.   At this point, my desk is littered with various heavy stacks of papers – copies of the law, regulations, and various commentaries elucidating these changes and how to implement them for our clients.

Part of me wants to laugh a little bit when I hear politicians refer to TCJA as “an overhaul of the tax system.”  The Internal Revenue Code is thousands of pages long.  TCJA changed a few hundred.  So we are hardly talking about a “from the ground up” approach to reforming our taxing system.  However, TCJA does make some pretty sweeping changes that will fundamentally transform the way that we advise our clients.

TCJA has basically introduced a “new language” in the world of tax planning.   Tax planning used to be a fairly one-dimensional enterprise – how do we get you to pay the least in taxes THIS year?  At most, we might have been looking at 2-3 years of activity for tax planning and often then only looking at one or a few sources of income.  For instance, how much should I distribute from my IRA in retirement to maximize lower tax brackets over 5 years?  Fairly simple.  TCJA has flipped this on it’s head in many ways.  Tax planning now must be looked at on a multi-year, multi-source, multi-dimensional level or there is almost a certainty that money is being left on the table.

So how, at Lanphier LLP, are we addressing these changes?  Right now, we are ramping up our planning efforts so that we can address these changes with each client before the year is over.  Some may need to make pretty drastic changes to their structure, their compensation arrangements, the timing and character of income and deductions, or their retirement plans in order to achieve the optimal tax outcome under the new law.  We have always used the 4th quarter of the year to conduct year-end planning.  I anticipate the resources we will need to devote to this in 2018 will be roughly 3-4 times greater than in any other year.

Additionally, we are trying to get out in front of what we anticipate to be a significantly increased workload next tax season.  The tax law changes, specifically Section 199A, require a tremendous amount of information gathering, even for small S Corps and partnerships.  The IRS estimates that the response time for Section 199A will range from 0.5 hours to 20 hours (!) with an average of 2.5 hours per respondent.

While all of this extra work is admittedly a bit daunting, this is actually one of the most exciting opportunities I have had in my career.  Never before have I had the opportunity to push the needle so far for my clients benefit through effective tax planning as I do right now.  Confession:  I have always been a bit of a jigsaw-puzzle nerd!  TCJA is like opening up a new puzzle for each client.  It is exciting and rewarding to put that puzzle together and see how much we are able to save for our clients.  In many cases it is in the tens to hundreds of thousands of dollars over the coming years.  Therefore, we’ll be putting on the coffee and working long hours over the coming months to ensure we save your family every dollar we can.  As a small business owner and parent myself, I know how far those savings will go towards things like student loan debt reduction, college savings, and more breathing room for your household.