What to expect when Trump’s tax law takes effect

President Trump’s new tax law makes changes to the code that will shape decisions made from individual filers to massive corporations.

The new law, which for the most part takes effect Jan. 1, is already influencing taxpayers’ behavior, with some companies announcing bonuses and hordes of citizens in high-tax states rushing to prepay their property taxes.

As the measure goes into effect, individuals and businesses will have lots of questions, and many will engage in new planning strategies to get their tax bills as low as possible.

Meanwhile, the IRS will be pressed to issue a slew of new guidance to address areas of the law that lack clarity and to prevent the new code from being exploited.

“It’s going to be kind of tumultuous over the next several months and years,” said John Gimigliano, principal in charge of federal tax legislative and regulatory services at KPMG.

Here are some of the things to expect as the new tax law takes effect:

Withholdings

One of the IRS’s first actions next year will be to issue new guidance on the tax withholdings from employees’ paychecks.

For many taxpayers, the decrease in tax withholdings from their paychecks will be their first chance to get a tangible benefit from the tax cuts. Republican politicians have said they expect the new tax law to become more popular once people see more take-home pay.

The new guidance is expected to be issued in January, and employers are expected to implement the new tables by February. The new guidance is expected to work with the W-4 forms on withholdings that employees have already filled out.

“Come February, check your check,” House Majority Leader Kevin McCarthy (R-Calif.) said following passage of the legislation.

Estimated taxes

Many workers in the U.S. are not employees but instead are business owners, self-employed or independent contractors. These workers make estimated tax payments on a quarterly basis, with the payment for the first quarter of 2018 generally due in April.

There will be some differences in calculating estimated payments under the new code — particularly for small-business owners who for the first time will be dealing with a new 20 percent deduction for income from pass-through businesses, which are taxed through the individual code.

“It’s a complex calculation,” Gimigliano said.

A challenge with the new pass-through deduction will be in determining what is and isn’t considered business income.

Kathy Pickering, executive director of the Tax Institute at H&R Block, said she hopes the IRS puts out guidance on this topic quickly, before estimated payments are due.

“There will be time between now and then for the IRS to provide some guidance on these things,” she said.

The upcoming tax-filing season

This spring’s tax-filing season will be the last one under the old tax code, so generally there won’t be too many differences compared to previous years.

But taxpayers have been taking some steps in order to get the optimal benefit from the old code before the new code is in place.

Taxpayers who prepaid their property taxes have been doing so in order to deduct as much as they can before the new code imposes a $10,000 cap on state and local tax deductions.

Additionally, some taxpayers might have increased charitable contributions in 2017, since fewer people will claim a charitable deduction on their 2018 returns as a result of the larger standard deduction in the new law.

While most of the new law’s changes will be not in effect for the taxes people file in early 2018, some taxpayers may get perplexed and call the IRS with questions relating to the new law.

“There might be a fair number of folks who might be confused with the effective date of the law,” said Todd Simmens, national managing partner of tax risk management at BDO.

Gimigliano recommended that the IRS take steps to make taxpayers aware that the new law doesn’t take effect until 2018, for the tax returns that people file in early 2019.

“It would probably behoove the IRS to do an education campaign to that effect,” he said.

Business tax planning

Businesses will be looking at a host of issues as they figure out how to get their tax bills as low as possible under the new law.

Companies may evaluate whether it makes sense to participate in new mergers and acquisitions. In recent years, a number of U.S. companies participated in transactions called “inversions” — merging with foreign companies and then reincorporating overseas to lower their taxes. Businesses will have to look to see if those types of transactions would still be worthwhile under the new code.

Businesses will also have to figure out if they want to be pass-throughs or corporations, where they want to locate their profits and what they want to do with any additional income they receive. 

Tax experts think there are a lot areas on the business side where the IRS will need to provide guidance.

On Friday, the IRS issued guidance about the new law’s one-time tax on U.S. companies’ foreign earnings. The agency will also have to issue guidance in other areas in the future, such as on the new limit on businesses’ ability to deduct their interest expenses. 

“The questions are numerous,” said Phil West, chairman of Steptoe & Johnson.

Changes at the state level

State governments may also take new actions in 2018 in light of the new federal tax law.

States often have elements of their tax codes conform to the federal tax code, but they set their rates separately. As a result, many states will see their tax revenues increase in the short run because they will have broader tax bases and no changes to their rates.

Nicole Kaeding, an economist at the Tax Foundation, said that elected officials at the state level will have to decide what they want to do with the additional revenue, whether it be lower their own rates or undertake new spending. They will also have to figure out if they want new provisions in the federal tax law added to their state tax codes, such as the pass-through deduction.

“There’s a lot that states are going to do,” she said.

High-tax states may also feel pressure to lower their taxes or make changes in response to the $10,000 cap on the state and local tax deduction. While that cap doesn’t directly impact state revenues, their residents will now be feeling more of a burden from the state taxes.

New York Gov. Andrew Cuomo (D), who has been upset about the limits on the deduction, has also said he’s considering suing over the tax law.