While it aims at some level of tax simplification, the Tax Cuts and Jobs Act released on Thursday by the House Ways and Means Committee gives tax preparers plenty to talk about with their clients, offering rate cuts, eliminating familiar deductions, adding and expanding credits, and removing the estate tax and the Alternative Minimum Tax.
But it’s still a bill, not a law. “It’s another step in the process – a significant one, of course, but we don’t know where the Senate is on this, and there are still members of the House that may not support it,” said Todd Simmens, a partner at BDO and former staff member of the Joint Committee on Taxation.
Even if the bill is enacted in much the same form as today’s version, most of the provisions would only be effective on Jan. 1, 2018. “The caveat is that we don’t know what the final bill signed by the president would look like,” he said. “A lot of things can and will happen.”
Simmens cited rate reduction, the doubling of the standard deduction, the Child Tax Credit increase, and the repeal of the AMT as major policy changes. “There will be lobbying both in the House and Senate from special interest groups,” he predicted. “We’ve already seen market fluctuation in home building because of the proposed limitation on new mortgages.”
The bill would reduce the corporate tax rate to 20 percent but proposes a rate of 25 percent for passthrough entities. “Would a C corporation that invests in a partnership be subject to the 20 percent or 25 percent rate?” Simmens asked. “There are a host of details and planning opportunities that preparers should be bringing to the attention of their clients.”
Dean Zerbe, former Senior Counsel to the Senate Finance Committee and current national managing director at alliantgroup, agreed.
“Before the end of the year, [tax professionals] should definitely be talking to their clients,” he advised. “If there’s a possibility to defer income, that would be a clear choice. But most of it will be effective for the upcoming tax year, so the important thing for preparers is to informing your clients of what’s out there and what’s possible so they can make choices about any transactions that they may want to do before year-end, or delay until next year.”
“The increase in the estate tax exemption as opposed to repeal [which is slated for 2024] means that all traditional estate planning techniques continue to be viable,” said Bill Smith, managing director at CBIZ MHM. “Many clients thought that as long as they survived past December 31, they would not have to worry about estate planning, but that’s not the case. Under this bill, you have to live six more years if that’s your estate plan.”
“If people are going to lose their state and local tax deduction, they should consider paying the tax before December 31 in the hope that they get at least one more year of the deduction,” Smith said.
Many details to come
At 419 pages, there’s much in the bill that isn’t set, according to Smith. “Real estate and small businesses are exempt from the interest rate cap of 30 percent of earnings,” he noted. “There’s going to have to be a lot of drilldown to figure out what it means.”
A case in point is the just-released Notice 2017-67, providing guidance under the 21st Century Cures Act, according to Roger Harris, president of Padgett Business Services.
“The IRS took 59 pages to explain what Congress did in one page,” he said. “Assuming Congress finishes its work and the president signs tax reform into law, then the IRS has to come up forms and regulations.”
The tax reform bill still has to get through the House, where changes will be made, and then through the Senate, where more changes will be made, Harris observed. “If something like this is close to becoming law, clearly there are discussions we have to have with our clients,” he said. “The transition rules are key. For example, the bill calls for an expanded use of cash accounting for small businesses, including not having to track inventory when calculating the cost of goods sold. How do they transition what is already on the books down to zero?”
“This bill is tax reform with a capital T,” said Dustin Stamper, managing director at Grant Thornton’s Washington National Tax Office. “There are some interesting implications for estate planning. They provided repeal in six years, but also preserve a step-up in basis, so the heir can inherit and sell without capital gain. In addition, the gift tax remains after estate tax repeal, so so there’s an incentive for folks to hang on to their property and not give it away during their lives. On the flip side, they may want to gift it to charity during their life to get the gift tax deduction.”
“But the political pendulum always swings back and forth, ”Stamper observed. “If the Democrats are back in power before estate tax repeal takes effect, it may not survive. And I’m not sure that it will survive into the final cur in its present form.”
Taxpayers should consider accelerating any deduction and taking any credits that they might lose. “To the extent they can prepay state taxes before year’s end, they should do so,” he advised. “They can do this with regard to taxes that are not due until next year, but only if they are on income from this year,” he explained.
For preparers concerned about the promise to enable 90 percent of taxpayers to file their taxes on a return the size of a postcard, Stamper had some reassuring words: “That’s just a sound bite,” he said. “The kind of taxpayers that go to accounting firms will still very much need accountants after the legislation passes. Although there is some simplification going on, there are also a lot of complex new provisions.”
Mark Steber, chief tax officer at Jackson Hewitt, agreed. “We already have Form 1040 EZ – there’s not that much difference between that and the simplification envisioned in this legislation,” he said. “And the Earned Income Credit, the higher education benefits, and the Child and Dependent Care Credit would be very difficult to include on a postcard, but they’re very popular and are used by tens of millions of taxpayers. As long as our society stays as complex as it is, and our tax system tries to mirror the complexity of our American populace, it will be difficult to have a fair tax return on a postcard.”
Michael Cohn contributed to this article.
