Roger Philip, CPA, CGMA, CEO of Roger CPA Review, discusses the different ways in which the Tax Reform will impact the CPA Exam and how candidates can prepare for these changes in order to be successful on Exam Day. Watch his video or read the article below to learn more:
Tax Cuts & Jobs Act Overview
In a nutshell, this new Tax Reform is:
Lowering the corporate tax rate from 35% to 21%.
Increasing the standard deduction from $6,000 to $12,000. If you're married and filing taxes jointly, that's a standard deduction of $24,000; Therefore, many people who used to itemize through Sch-A will no longer need to do so.
Increasing the child tax credit from $1,000 to $2,000, and changing the phase out threshold up to about $400,000. This would allow most Americans to qualify and receive the $2,000 benefit, which will help stimulate the economy.
Limiting itemized deductions on the Schedule-A. A good way to remember this is through a mnemonic I commonly use to teach, which is “COmMITT this to memory”:
C – Charity
Om – Other miscellaneous
M – Medical
I – Interest
T – Tax
T – Theft & casualty
This involved a variety of areas like charitable contributions, which they increased to 60% from 50% of AGI for cash donation; property taxes and sales taxes; and state taxes, which are now limited to $10,000 per return. In addition, mortgage used to be a million with equity and is now limited to $750,000 of principle, and casualty losses are now federal disaster areas only.
Creating a new 20% Qualified Business Income deduction to lower tax rates for owners of certain pass-through entities & sole proprietorships (S-corps/P/s). This is probably one of the biggest changes we've had throughout the entire tax code in the past 30 years. So it not only significantly changed individual taxes, but also business entities, which a lot of you may be studying, or have studied in school already.
Let's talk a little bit about how the TCJA will affect CPA Exam content.
Now, the tax reform will impact all the sections of the REG exam starting in January of 2019, accounting for as much as 80%. As a result, the AICPA has been busy turning the exam upside-down, shaking out all the broken pieces and putting it back together with revised and new multiple choice questions and task-based simulations.
Normally, when material on the CPA Exam changes, there is a 6-month lag for when it can actually go into effect and be eligible for testing. Therefore, although the Tax Reform passed in December of 2017, it impacted the Regulation section so much that the AICPA needed time to reflect the changes in that section, thereby making it eligible for testing in January of 2019.
There are several different types of changes to keep in mind here.
Some of the provisions are going to be totally repealed and not replaced. For example, there's no more alternative minimum tax, or AMT, for corporations. They still exist for individuals, but it's been repealed for corporations.
There are also quite a few changes that have been made permanent mostly for corporations, such as a new flat 21% tax rate versus the old graduated tax rate system. The new rates are changing from 70% to 50% and 80% DRD to 65%, so say goodbye to those old percentages; unless, of course, you take the exam during 2018 before 2019, then all those rules that you've already learned will still be in effect.
Where it gets a bit tricky is when we get into the high volume of individual taxation changes, where many of them are temporary. For example, alimony rules are changing, which means that if you get divorced before 2019, the current rules still apply. However, if you get divorced after 2019, alimony is no longer deductible and it will not be taxable to the person receiving it.
There are also some tax provisions that are entirely new and slightly complicated, like the 20% qualified business income deduction, QBI, which is for certain pass-through entities like escorts and partnerships. The IRS still doesn't have all the answers on this one, which is why it’s still a bit gray.
How will the CPA Exam blueprints be affected?
As the REG section evolves and changes to reflect the new tax reform, we should get a revised copy of the CPA Exam blueprints by the middle of this year. Some of the obsolete items like corporate AMT will be removed from the blueprints, but new areas and topics that weren’t tested before most likely won’t be tested in the future, and therefore probably won’t be added.
However, this doesn't mean that a new deduction, for example, wouldn't be testable. A new deduction for individuals would be testable under what we call topic C, which is adjustments and deductions to arrive at AGI and taxable income. It also doesn't necessarily mean that you won't see any new representative tasks, since these are just examples of what you might see tested under a particular topic.
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