Get started on tax planning before end of year, experts say

April 24--Peninsula residents may have noticed more money in their paychecks earlier this year after tax reform took effect, but local tax experts are telling individuals and businesses to plan ahead to avoid any surprises next filing season.

"This is affecting what you're filing a year from now," Mike Mendelsohn, tax partner with PBMares in Newport News, told attendees of a seminar at the Virginia Peninsula Chamber of Commerce offices in Hampton on Tuesday. "Now is the time to start thinking and planning and talking to your adviser."

Employers adjusted employees' federal income tax withholding based on Internal Revenue Service guidance in February. However, the IRS and local experts are saying employees should double-check to make sure the right amount of taxes are being withheld from their take-home pay or they might be in for a surprise next year.

The most significant tax law overhaul in more than 30 years -- the Tax Cuts and Jobs Act -- was signed by President Donald Trump in late December with most changes taking effect Jan. 1.

And while accountants and tax experts can help taxpayers plan ahead, a lot of the regulations still have yet to be written, said Kasey Pittman, PBMares tax manager. More guidance about the W-4 tax withholding will be coming out later, too, she said.

Having too little withheld can result in owing taxes, while other taxpayers may want more money in their paychecks up front instead of a large refund.

Overall, the law lowered individual tax rates in six of seven tax brackets while also widening the brackets. High-income earners in the top bracket will see a more substantial reduction than low-income earners, Mendelsohn said.

The tax law gets rid of exemptions and limits deductions in exchange for a near doubling of the standard deduction that is expected to significantly decrease the number of taxpayers who itemize, Mendelsohn said. Still, the tax law did not result in tax simplification, he said.

Tax reform repealed the penalties of not having health insurance under the Affordable Care Act, but that change does not go into effect until 2019, Mendelsohn added.

Starting this year, the itemized deduction for state and local income taxes is limited to $10,000, significantly affecting high-income taxpayers, Pittman said.

The child tax credit also increased from $1,000 to $2,000 per child with the credit phasing out starting at $400,000 for married taxpayers instead of the previous $110,000, Mendelsohn said. And money in 529 accounts changed from being allowed only for qualified higher education expenses to also being allowed for tuition at elementary or secondary private, public or religious schools up to $10,000 per student.

One major source of confusion -- and possibly one of the biggest benefits to small business owners -- is the new 20 percent deduction for qualified business income from partnerships, S corporations or sole proprietorships, Mendelsohn said. There are a lot of uncertainties as taxpayers are still waiting on IRS guidance for this new code section that has limitations, including income thresholds, he said.

Another limitation is being a higher-earner in "specified service trade or business" such as in the fields of health, law, accounting, consulting, financial services or any trade or business in which the principal asset is the reputation or skill of one of more of its employees or owners, Mendelsohn said. He said he expects there to be disputes over such professionals or businesses not being able to get the 20 percent deduction.

"There are going to be a lot of nuances depending on your business," Pittman said. "It's going to vary greatly on your individual circumstances."

Anne-Lise Gere, a human resources adviser and consultant in Newport News, came to the seminar to learn how the tax law changes would affect her as a small-business owner. The event raised questions and Gere said she plans to talk with her accountant. She said she also wondered how nonprofits might be affected if folks are less motivated to make tax-deductible contributions.

"Tax impacts everybody," Gere said.

Small business owner Diane Lee, who provides tax preparation and review services through Lee Tax in Newport News, said a lot of the deductions she helps taxpayers find are removed with the new tax law, so she needs to find ways to adjust her business.

"I came out because these laws are so complicated," Lee said of attending Tuesday's session. "I wanted to be more informed."

Bozick can be reached by phone at 757-247-4741. Sign up for a free weekday business news email at TidewaterBiz.com or follow @TidewaterBiz.

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