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Five on Fridays: Tax Cuts and Jobs Act Highlights

Very soon (if not today), President Donald Trump is expected to sign the Tax Cuts and Jobs Act ("the Act"), passed this week by the House and Senate.  Below are the top 5 highlights of the Act for individuals and small business owners:

  1. Lower rates reward deferring income and expenses to 2018 -- The Act will lead to lower rates for many taxpayers in 2018. As such, it behooves individuals and small business owners to defer income and expenses into 2018, which should result in a lower effective tax rate and deferment of the the taxes owed on such income.  

  2. Pass-through income -- The Act creates a new 20% deduction for income derived from pass-through entities such as LLCs, S-Corporations, partnerships, and sole proprietorships. Individuals who receive income from flow-through entities will be allowed a deduction of 20% of their flow-through income on their personal tax returns.  This provision also reiterates the benefits of deferring taxable income for such entities to 2018 (see #1) in order to take advantage of this new deduction. 

  3. Maximize your state and local tax deductions while you still can -- The Act caps deductions for state and local taxes at $10,000. While the Act specifically prohibits prepaying state and local income taxes in 2017, taxpayers may still prepay state and local property taxes in 2017.  If you have the ability to pay any state and local property taxes before the end of 2017, you will probably benefit by doing so, as you may not be able to deduct the full amount in 2018 if your total state and local tax deductions exceed $10,000. 

  4. Say goodbye to meals and entertainment deduction -- For many years, small business owners have been able to deduct 50% of the cost of meals and entertainment expenses incurred for business purposes (i.e. wining and dining clients, etc.).  The Act eliminates this deduction.  To the extent possible, consider prepaying in 2017 expenses for any meals and/or other entertainment expenses (i.e. season tickets to your local sports team, etc.) in order to claim this soon-to-expire tax benefit. 

  5. "Where did you go to high school?" -- In St. Louis, people often (annoyingly) ask new acquaintances where they went to high school.  The Act lessens the burden of paying for private education in that it expands the tax benefits of 529 Plans to include payment of K-12 expenses. Under the Act, up to $10,000 per year may be used for students in grades K-12 for tuition expenses, books, curriculum, online educational materials, tutoring, dual enrollment at institutions of higher education, and educational therapies for students with disabilities. This includes qualified expenses for public, private, or religious schools.

Disclaimer: Every taxpayer's situation is unique, and you should consult with a trusted tax adviser regarding how the Tax Cuts and Jobs Act will impact your situation.  

Mark Milton