While the new federal tax law was born as an effort to simplify the nation's complex income tax system, that's not how it turned out, the CEO of a major Colorado Springs accounting firm said Wednesday.
While filing an annual tax form may be easier for many individuals because more taxpayers will use the larger standard deduction included in the law, tax filing will be more complex for small business owners and larger companies, said Chris Blees, president and CEO of BiggsKofford & Co. He made the comments during a panel discussion for customers and others at the Cheyenne Mountain Resort.
"Simplification didn't happen, but it did for some individuals because of the higher standard deduction," Blees said. "By and large, most folks will see a reduction in their taxes, especially those who are not in high-tax states, including Colorado," though he stressed that the IRS must still develop regulations based on the Tax Cuts and Jobs Act.
The biggest changes for individuals include nearly doubling the standard deduction - used by taxpayers who don't have more in itemized, or detailed, deductions for mortgage interest, state and local taxes, medical expenses and charitable donations - to $12,000 for individuals and $24,000 for married couples. However, personal exemptions of $4,050 per person were eliminated in the new law; while the child tax credit is doubled to $2,000, large families will likely have higher tax bills, said Michael McDevitt, chief operating officer of BiggsKofford.
The new law also limits the total deduction for state and local taxes to $10,000; limits the size of loans eligible for the mortgage interest deduction to $750,000; and ends deductions for interest on home-equity loans and employee business expenses that aren't reimbursed, McDevitt said. The legislation also lowers the tax rates on most income except the lowest bracket. It also widens the range of income included in each of the seven tax brackets, which means more of a taxpayer's income is subject to a lower rate and thus reduces their overall tax bill, he said.
The biggest tax benefits for businesses in the new legislation come from lowering the corporate tax rate from 35 percent to 21 percent and creating a new "pass-through" deduction of 20 percent for income that owners or partners receive from small businesses, said Greg Gandy, a BiggsKofford tax director. The pass-through deduction includes many exclusions and limits, requiring a complex set of calculations to determine whether that or another business deduction is most beneficial for the business and its owner or owners, Gandy said.
The pass-through deduction could result in "substantial tax savings for many individuals, especially those who own businesses in real estate, manufacturing and retailing," Gandy said. That deduction mostly benefits profitable businesses, since the new law limits how much losses can be used to reduce income that is taxed, he said.
Most of the provisions in the legislation don't apply until tax filings for this year that will be made in 2019. The individual tax changes expire in 2025, so the tax rates and deductions would then revert to what they had been for 2017 taxes that will be filed later this year.
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