A word of advice: if you haven’t already made an appointment to file your taxes, you want to do that immediately. Your federal returns are due this year on April 17, but the new tax plan signed into law is labyrinthine and abstract, including many changes that affect California homeowners and businessowners, adding complications to even the more straightforward tax returns.
If you normally file your own taxes or use an online filing system, you may want to read up on the literature of the new tax plan, especially if you have itemized deductions. However, it is recommended that you consult with a CPA, who will have all the information available on the requirements for your tax bracket. There is so much that is new this year, and even more that is ambiguous and untested. You might have an increase in taxes this year, or there is the potential of missing out on a possible deduction you now qualify for.
For business owners, the two most important developments in the new plan is the reduction of the federal C-corporate tax rate from 35 percent to 21 percent and that, additionally, S-corporations, partnerships (LLCs), and possible schedule C filers are potentially eligible for a new 20% deduction.
However, for residents of La Jolla and the rest of California, one of the high-service, high-tax states, the big hit to normal deductions is the decreased limit on deductions for state and local taxes, known as SALT. Taxpayers can to deduct up to $10,000 in state and local taxes, including property taxes. However, for Californians used to the SALT deductions, between 11% and 14% of California taxpayers will see an increase in their taxes. Overall, this new plan will likely affect up to six million California residents. The average property deduction has been about $6,000, but the separate deduction for state and local income taxes has previously amounted to almost $16,000 per return.
One thing accountants and legal scholars have noted is the great ambiguity in the current tax plan, which a savvy accountant can help work to your advantage. California legislators are already working on ways to help middle class homeowners, including a bill that would affect corporations with an annual net income of more than $1 million. California has a state corporate tax rate of 8.84 percent. But any bill proposed will have to be approved by the State Legislature and then go on the next ballot for a state-wide vote—meaning this will have no affect on your taxes this year.
Another of the ambiguities offering a potential tax loophole would allow the Legislature to redefine state and local taxes as charitable contributions. In fact, the IRS as well as federal courts have already ruled it is possible for government entities to count as charities for the purpose of a charitable deduction, even if the donor receives a full state or local tax credit.
Additionally, since businesses can deduct state and local taxes, according to some legal experts, they should also be permitted to restructure state and local taxes as payroll taxes payable by employers, meaning they could be deductible. A deft tax expert can make sure employees get the benefit of the employer deduction.
In the meantime, how can the average taxpayer benefit (or at least not be hit hard) under the new tax plan? First off, get your bookkeeping aligned prior to sending your taxes to your accountant. For itemized deductions, make sure you have receipts or proof for any deductions you are filing for claims on childcare, education, home improvement, or donations to charity. You will also want to hold onto these receipts for a minimum of three years, in the event of an audit.
One thing for sure is there are definitely going to be a lot of differences in 2018 between federal and California tax law, which will only increase the complication of tax filing.
For those who are newlyweds and this is your first time filing as such, make sure to file a Form 8822 if you’ve had a change of address or an SS-5 if you’ve changed your name. Additionally, if you’re filing jointly, you’ll need to file a W-4 in order to adjust tax withholdings based on the new household income.
At Steven Alpinieri CPA, An Accountancy Corporation, we know that a complicated tax return should not hinder your ability to keep your business running. That’s why we offer personal tax filing as well as business consultation services to help you with not only filing your tax returns but also helping you design an overall personalized tax plan. For any questions on tax planning and tax preparation, including tax special projects, in the La Jolla and surrounding areas, visit us at sandiegocpasteve.com or give our offices a call at 858-230-6610.