There’s nothing certain except death and taxes, the saying goes. The only problem is, lately, uncertainty surrounding the tax code has made a crystal ball as important a tool for CPAs as a calculator.
The Trump Administration’s tax plan has injected a huge dose of uncertainty into this and the following year’s tax planning, as accountants try to figure out how taxpayers should best prepare with many rules in flux.
This isn’t totally new, since talk of tax changes does this to some extent every year. But the scope of what’s at stake is turning this year into one when planning becomes more complex, due to potentially sweeping changes.
Lance Christensen, partner in charge of the tax department at Margolin, Winer & Evens, in Garden City, said taxpayers should be ready to take certain actions, depending on how the code evolves.
“If you were to believe these provisions will be enacted, there would be a lot of things our clients should do,” he said. “Because of the uncertainty, there’s a lot of wait and see.”
Tax reform traditionally doesn’t happen overnight. So there is no guarantee that any or all of the current plan will take effect. But it still makes sense to be prepared in case various provisions pass.
“It’s important to think about transactions in the queue and make a decision as we get closer to year end as to whether we should trigger transactions,” Christensen added. “Historically, tax reform takes a long time. The 1986 act took a long time to be enacted, but it got enacted.”
He said that tax reform means big changes, while individual portions could advance, even if the full package does not.
“They may settle on some one-offs or tax cuts,” Christensen added. “People should understand the items they should be ready to trigger when we get closer to the end of the year, if we get more information.”
Long Island University’s College of Management’s Accountancy and Finance Professor Michael Abatemarco said it’s important to understand the impact the changes would have on one’s income taxes.
“Individuals and business entities are already navigating complex tax laws and other regulations in order to minimize risks while taking advantage of various business and investment opportunities,” Abatemarco said in a written statement. “All investment and financial decisions require a clear understanding of the long-term consequences, so that they are driven by a sound strategy that incorporates legal, accounting and tax planning.”
The words “what if” these days, however, may matter as much as the case of “what is” in the tax code.
The Trump tax plan, for instance, calls for immediate expensing of equipment rather than gradual depreciation.
“If you think these would be enacted next year, you might want to hold off purchasing equipment,” Christensen said. “If you want to buy a business, we might be better off waiting until next year.”
If you bought new trucks, for instance, you could take an immediate deduction as a capital expense if the Trump plan passes, potentially favoring a delay until it takes effect.
On the other hand, tax rates this year could be higher for many than they would under the Trump plan, making deductions more valuable today.
It may be wise to pay state income and other taxes in 2017 rather than delaying into 2018, if you believe they will no longer be deductible.
“There’s not a one-size-fits-all approach,” Christensen continued. “Oftentimes, taxes don’t drive the bus. The deal has to get done for legal or business purposes.”
The Trump tax plan also calls for many other changes, such as lowering the corporate tax rate from 35 percent to 20 percent. If you think that might happen, you’d want to defer income. “That is a huge reduction in the corporate tax rate,” Christensen added.
Small business, pass through entities, could see rates drop to 25 percent from 39.6 percent after money is distributed.
The repeal of the alternative minimum tax and the elimination of taxes from the list of deductions could have a huge impact.
“Your tax could actually go up, even though you’re no longer in the Alternative Minimum Tax,” Christensen said.
Gov. Andrew Cuomo said prohibiting deductions for state and local taxes could lead to bigger bills for many New Yorkers and Long Islanders.
“If you can’t deduct your taxes, your taxes are going up,” Cuomo said. “There are no tax cuts to the people of Long Island.”
In some cases, it’s hard to tell how provisions would impact taxpayers. Although the Trump plan calls for brackets with rates of 12, 25 and 35 percent, it doesn’t yet indicate what incomes would match each bracket.
“We don’t know when the 35 percent tax rate or 25 percent rate will kick in,” Christensen said. “The brackets have not been identified.”
The plan also would allow companies to repatriate off shore earnings at a 10 percent rate today and with no additional tax in the future.
“It’s designed to make it competitive with the rest of the world,” Christensen said. “Most of the rest of the world has that tax structure. They don’t tax earnings from off shore companies when they get repatriated back.”
That could lead to trillions of dollars coming in from offshore, but there may be a big fight over repatriating future earnings with no tax.
Trump’s plan also calls for eliminating the estate tax, which currently kicks in at $11 million for married couples.
“People should do estate planning,” Christensen said, even if the estate tax is repealed. “The estate tax may return in a future administration.”
The estate tax threshold already has risen steadily, eliminating the tax for many wealthy people.
“It’s really grown, so fewer estates are subject to the estate tax today,” Christensen said. ”A lot of very wealthy people have estates over $11 million.”
While some measures could pass by themselves, it’s less likely the whole package will be enacted.
“I believe we may get tax cuts and not tax reform,” Christensen said. “Some provisions where there’s not much opposition like repatriation, to get money back here and use it for infrastructure, are not as contentious as some other things.”
Other measures such as repealing the AMT are likely to be linked to measures, such as disallowing state income tax deductions.
“They all hang together,” Christensen said of key changes. “You have to measure the cost and the benefit.”