Q&A Topic: What the New Trump Tax Law Changes Mean for You and Business — and Why You Need Tax Counsel
Jorge Rodriguez, Esq.
Q: How do you view the new Trump tax law, and can you give us a broad overview of the changes?
A: The Congress enacted the Trump tax law at the end of 2017, and it represents the broadest, most sweeping tax law changes we’ve had since 1986 under the Reagan Administration. It affects taxpayers at three levels: Domestic (with Federal tax consequences for companies and individuals); State and local (particularly in high-tax states such as NY, NJ, CT and CA); and at the International level, where it will have a wide and significant impact.
A broad overview of the changes includes the following:
• Changes to tax brackets, income levels and tax rates: The top tax rates for individuals, for example, will now be 37%, which will apply to single filers at $500,000 or more, and to married couples who are filing jointly at or above $600,000 of income.
• Personal exemptions for individuals were repealed: Instead, the new tax law doubles the standard deduction—it is now $12,000 for single filers and $24,000 for joint filers.
• Alternative minimum tax (AMT) has been modified for individuals and, at the corporate level, was repealed.
• Miscellaneous deductions have been broadly eliminated.
• Mortgage interest will no longer be a deduction for equity lines of credit.
Q: Who will these changes affect?
A: The changes are relevant to nearly all taxpayers, including foreign taxpayers doing business in the United States or with some nexus with this country. Individuals, businesses, partnerships and companies that operate locally, nationally or globally need to be aware that there is significant uncertainty about the new law’s application.
Employees should take a look at their withholding levels with their employers to make sure they’re withholding at the right levels. The government recently issued a new W4 form and the IRS recently issued new taxation tables as well.
Q: What types of deductions and benefits will have the greatest impact on businesses?
A: There’s a brand new 20% deduction available for certain ‘pass-through’ income and those business entities that qualify for this deduction, for example partnerships, will have a significant new tax benefit. It’s incumbent upon businesses and taxpayers to make sure that their pass-through income qualifies for the new deduction, and there are many details about how they may or may not qualify.
This is a good time for any business to take a fresh look at how their business is organized, especially in regards to their choice of entity as a corporation, as a pass-through entity, or some other combination. Generally speaking, corporations now pay 21% tax—a 14% reduction from the previous level of 35%—so the choice of entity for business has legal implications in addition to the tax considerations.
Another important change is that under the new tax laws, certain foreign source income will not be taxed in the United States. This is a very important change for taxpayers and businesses with operations abroad. There is also a one-time deemed repatriation tax on deferred income from foreign corporations, a change that’s applicable to U.S. taxpayers who own one or more foreign corporations. Certain foreign dividends for foreign businesses in which U.S. taxpayers or businesses have interest will not be subject to U.S. Federal tax under the new tax rules.
Q: What impact will the new tax laws have on state and local taxes?
A: Due to the wide creeping nature of these new tax laws, states are now considering and reevaluating the extent to which they conform to and adopt the Federal tax code. States may adopt the Federal taxable income as the starting point for state computation of state taxable income, yet states are free to modify the starting point as they deem fit. In light of the broad impact of the new tax law, states are actively evaluating the degree to which they will conform to and follow the Internal Revenue Code.
States’ conformity to Federal tax laws is very important in the tri-state area as many people not only live and work in different jurisdictions, but also work and have income in various states or operate business in multiple states. The impact of these new Federal tax law changes to the state and local level tax application of the Internal Revenue Code cannot be over-emphasized. By the time people read this, a U.S. Supreme Court decision will have been issued in the South Dakota vs. Wayfair case, which will determine whether or not to overturn the U.S. Supreme Court’s 1992 Quill case precedent. This decision covers whether the jurisdictional standard for states to impose sales and use tax obligations on out-of-state taxpayers will change, and it will determine whether economic (versus physical) presence in a state is sufficient for tax purposes. The decision in the Wayfair case, combined with the new Federal tax law changes, only increases the importance if not necessity of hiring knowledgeable tax counsel.
Q: Why may taxpayers need tax attorney counsel in addition to simply working with their accountant or C.P.A.?
A: In light of the scope, complexity and depth of technical changes in the new tax laws—combined with the uncertainty about the application of tax regulations and tax court cases—people are generally well advised to hire and work with tax counsel when circumstances warrant. The IRS is issuing new guidance regarding the Federal tax law changes, and there is significant uncertainty about this interpretative guidance as well as uncertainty regarding the gaps that exist within the new Trump tax legislation itself.
Rodriguez Law Firm works closely with accountants and other non-tax counsel to resolve tax issues, assist with tax planning and tax structuring, and assist with tax controversy matters, including audits, tax examinations, assessments as well as litigation issues with tax authorities. Preserving confidentiality of tax information records is one of many fundamental considerations: There is often no accountant/client privilege and, in New York State, this means that information shared with your CPA or accountant can be obtained by tax authorities or by parties involved in litigation. However, if you are working with tax counsel, it is possible to protect and preserve confidential and sensitive taxpayer information. Since the tax law is often unclear, working with tax counsel is invaluable to allow taxpayers and businesses to determine an appropriate position to take on their tax return, especially in regards to avoiding penalties and other exposures related to tax filing positions. Working with tax counsel is often a wise and prudent decision that can add significant value for businesses and/or for individuals.
Finally, while there are many pitfalls in light of the new Trump tax laws, there are also many opportunities: Working with tax counsel can have beneficial impacts if circumstances warrant it.
About Rodriguez Law Firm, PLLC
Rodriguez Law Firm, PLLC is a boutique law firm with offices in New York City and Washington, D.C. offering specialized services in tax law, including international, federal and state and local taxation, tax controversy and commercial litigation. Rodriguez Law Firm is dedicated to providing the finest legal services and counsel with an unwavering commitment to assisting clients. Rodriguez Law Firm was founded by attorney, Jorge Rodriguez.