The Tax Cuts and Jobs Act (HR 1) is now law and the IRS, tax professionals and taxpayers are gearing up to implement the massive overhaul of the Tax Code. For the IRS, one of the most immediate projects is the release of new withholding tables.
“With the passage of the Tax Cuts and Jobs Act, the tax planning paradigm has shifted significantly,” David Sites, International Tax Partner, Washington National Tax Office, Grant Thornton, LLP, told Wolters Kluwer. “The foundational techniques and strategies advisors and companies have relied on for 30 plus year need to be reevaluated through a new lens. Gone are the days of automatically defaulting to planning around corporate double taxation given the steep drop in corporate rates and significant incentives available to U.S. domestic corporations. Long story short, everyone will start the new year living in significantly altered tax environment and the agile and dynamic organizations will have the competitive advantage,” Sites said.
Wage earners generally have federal income taxes withheld from their pay. The amount of income tax withheld depends on the amount the individual earns and information given to employers on Form W-4, Employee’s Withholding Allowance Certificate. The allowances help determine how much federal tax is withheld.
Effective January 1, 2018, the Tax Cuts and Jobs Act imposes new individual income tax rates. The Act also eliminates the deduction for personal exemptions and doubles the standard deduction. As a result, the IRS must publish updated withholding tables for employers and payroll administrators to calculate paycheck deductions.
At press time, the IRS has reiterated that it intends to release updated withholding tables in January. “We are working to develop withholding guidance to implement the tax reform bill signed into law on December 22. We anticipate issuing the initial withholding guidance in January, and employers and payroll service providers will be encouraged to implement the changes in February,” the IRS posted on its website.
According to the IRS, guidance “will be designed to work with existing Forms W-4 that employees have already filed.” The agency added that “no further action by taxpayers is needed at this time.”
Note: The Tax Cuts and Jobs Act also impacts other withholding. Effective January 1, 2018 the rate on backup withholding is 24 percent. The old rate was 28 percent. The rates on supplemental wages also are affected by the new law. The IRS is expected to issue guidance.
State and local taxes
In response to the changes made to the state and local tax deduction, some jurisdictions allowed individuals to pre-pay 2018 property taxes. Others did not permit prepayments. Generally, the Tax Cuts and Jobs Act caps the individual deduction for state and local taxes (income, sales and property) at $10,000, effective January 1, 2018.
In recent years, some holders of virtual currency (such as bitcoin and litecoin) have applied the Code Sec. 1031 like-kind exchange rules to defer capital gains taxes. Effective January 1, 2018, the Tax Cuts and Jobs Act limits like-kind exchanges to real property.
Note: Three years ago, the IRS determined that virtual currency is treated as property and not currency for federal tax purposes, making it subject to capital gains taxes.