More states are offering pass-through entity credits (PTET's), allowing law firm owners to have their company pay their state income taxes. This helps to mitigate the $10,000 limit on taxes for those that itemize their deductions. So make sure you are taking advantage of this option when states allow. For some states, this is an election that has to be completed annually.
Spending limits on Health Savings Accounts and Flexible Spending Accounts or HSAs and FSAs are also rising. Both serve to allow people to set money aside for healthcare costs that manifest through deductibles and co-insurances you may have to pay.
Due to inflation, tax brackets are also being adjusted for single and household income. Standard deductions are also on the rise for those that don't itemize their deductions.
Estate exclusions are also on the rise, with 2022 capping out at $12.06 million (federally), so we all get to pass along a little more to our heirs.
Depending on the context of your situation, the changes listed will impact you differently. To start with individuals, there are a few key points to take with you. The first is that while it is expected that your taxes may rise this year, you may see additional benefits based on your gross income and any company benefits you receive.
Secondly, if you max out your PTET, you may even be eligible to take a standard deduction this year. This will depend, of course, on your charitable deductions and mortgage interest allowed, but this could be beneficial.
Lastly, if there is a death event in your family, the increase in the estate exclusion for 2022 allows families to pass on more assets to loved ones. The estate tax is a double taxation, and this topic always reminds us of how the late George Steinbrenner (former owner of the Yankees) died in 2010 when there were no federal estate taxes.
Law firms and lawyers in general already need to keep up with a good deal of financial law; however, The US has seen a shift in the dynamic of a lawyer's responsibilities. The first manifestation of this was in Arizona, allowing law firms to create an alternative business structure (ABS). An ABS is a business entity that includes nonlawyers who have an economic interest or decision-making authority in a firm and provides legal services according to Supreme Court Rules 31 and 31.1(c). According to the Task Force on the Delivery of Legal Services, the purpose of the ABS program is "rooted in the idea that entrepreneurial lawyers and nonlawyers would pilot a range of different business forms" that will ultimately improve access to justice and the delivery of legal services. Offer both services without fully certified staff members for each profession. It is expected that this trend will start popping up in other states across the US.
Our take on this at Interactive Accountants is that there will be a paradigm shift in the way medium to large-size law firms organize in the future. We are already seeing this happen at large accounting firms, where they are splitting off the non-CPA attest services, and such service firms are now being sold to private equity firms and then run like big corporations.
One final factor that we have found contributing to the merging of financial and legal consulting is the presence of new legal software. Initially starting because of covid and the need for digital work, this legal software gives legal offices another method of secure data sharing and now secure access to financial information at an asynchronous pace. Meaning that lawyers and accountants can do work for legal and financial clients anywhere at any time. This new software is going to be so crucial because it will allow ABS's to share data and work more efficiently. If these ABS's change the legal construct of the future or just be a fad remains to be seen. However, regardless of whether or not these changes spread, their impact will be seen across the US, and we predict that other forms of this will start popping up.
Given all of these changes to tax and attorney-based law, it is important not to get lost in all the information we have provided you. As previously mentioned, we will see quite a few adjustments in tax law in the coming year. The next best step to take is to get your business and personal finances in order now so that April 15th doesn't sneak up on you. The following recommendations that we here at Interactive Accountants are given to understand that it may be confusing to navigate the future changes in tax law.
Our primary piece of advice for law firm owners is to get a timely start on your personal and business 2021 tax returns. Specific advice we have for law firms going into 2022 is to familiarize yourself with these coming changes for your own clients and what they mean for you. Over the past few years, there has been a growing overlap between law firms and tax accounting in their duties and professional concerns. All of this means that lawyers are now seeing a shift in their professional responsibilities involving more financing than what has already been expected of the detail-oriented industry. As both law and accounting firms adjust to these new circumstances we want to reach out and be a helping hand!
Here at Interactive Accountants, helping businesses grow and succeed financially is our number one goal. We are here to help! If you're still not convinced yet to give us a call, feel free to look at our other blogs regarding the help we offer various businesses and offices.
If you are a professional in any field that these tips apply to, schedule a free consultation here with our owner Matthew Shiebler, CPA. He's been practicing accounting for over 25 years now and is a business owner, just like you!