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What to Expect in the Second Filing Season Under the Tax Cuts and Jobs Act

As we now officially enter into our second tax season under the Tax Cuts and Jobs Act, individuals and businesses alike are once again asking what to expect from the year to come.

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As we now officially enter into our second tax season under the Tax Cuts and Jobs Act, individuals and businesses alike are once again asking what to expect from the year to come.

As we now officially enter into our second tax season under the Tax Cuts and Jobs Act (TCJA)—the landmark tax reform signed into law in 2017 that created the biggest change in U.S. tax policy in more than 30 years—individuals and businesses alike are once again asking what to expect from the year to come. And while the uncertainty and unknown that accompanied last year’s tax season—as is customary following any monumental change—isn’t expected to be as prevalent, people still have plenty for which they need to prepare.

Overall, the theme for this year’s tax season is we should all be one year smarter regarding TCJA, and that vast sense of the unknown should now be beginning to dissipate. The major alterations still loom large—including the suspension of personal exemptions and higher standard deduction, the drop in the corporate tax rate, the limit on the deduction of state and local taxes, and the serious changes to the deductibility of meals and entertainment expenses, for example—but with a year under our belts, we should all be better prepared for Tax Day when it arrives in April of this year.

The key for this year is to now take a close look at what is out there and begin to possibly turn some of last year’s challenges into this year’s positives. On the individual side, this means further examination of the standard deduction versus itemizing, given the reduction of itemized deductions and the increase (from $6,500 to $12,000 for individuals and from $13,000 to $24,000 for married filers) in the standard deduction. This should cause people to consider what they traditionally deducted from their income taxes in the past and how to modify it to take full advantage of potential benefits.

Much of what changed on the individual side remains the same this year, with one major addition—for those who entered into divorce agreements with a spouse after January 1, 2019, alimony payments are no longer deductible, and alimony recipients will no longer be required to pay tax on their alimony payments or include them as part of their income. This new change is grandfathered to 2019, so it will not impact anyone who reached a divorce agreement in 2018 or prior. But for those who became divorced in 2019 and beyond, this is a big difference and attention needs to be paid to it.

On the business side, perhaps the most significant changes continue to be the drop in the corporate tax rate—which changed from a graduated scale that topped out at 35% to a flat one of 21% across the board—and the decision on whether to remain an S Corporation (a pass-through entity) or a C Corporation (with profits taxed separately from the company’s owners).

The two changes in many ways go hand in hand. With the TCJA, the flat 21% corporate tax rate had a direct and positive impact on C Corporations, so much so that it left some S Corporation owners wondering if they should change their corporate tax status. Those same questions should be asked this again this year, and the same variables that existed a year ago (whether the business qualifies for a 20% Qualified Business Deduction, and the impact potential losses could have on a C Corporation, for example) still exist today. Being a year more experienced with the nuances of TCJA, perhaps business owners will be able to make more informed decisions now.

This is still an awful lot to take in; after all, TCJA ushered in changes so sweeping that individuals and businesses were forced to adapt to a new tax landscape more significantly than at any time since the Tax Reform Act of 1986. But this doesn’t have to be a bad thing. Like with all changes, if we pay heed to how they impact us, we can emerge smarter and, potentially, in better shape at tax time than we thought we’d be a year ago.

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