TAX REFORM: Last-Minute Year-End Planning In Light of Tax Cuts and Jobs Act
Congress has enacted the biggest tax reform law in thirty years, one that will make fundamental changes in the way you, your family and your business calculate your federal income tax bill and the amount of federal tax you will pay. Since most of the changes will go into effect next year, there's still a narrow window of time before year-end to soften or avoid the impact of crackdowns and to best position yourself for the tax breaks that may be heading your way. Here's a quick rundown of last-minute moves you should think about making.
DEFER INCOME INTO NEXT YEAR:
- Postponing the conversion of a regular IRA to a Roth IRA will defer income from the conversion until next year and have it taxed at lower rates.
- Cash basis service businesses could postpone billing until next year in order to defer income until next year.
- The reduction or cancellation of debt generally results in taxable income to the debtor. If you are planning to make a deal with creditors involving debt reduction, consider postponing action until January to defer any debt cancellation income into 2018.
STATE TAXES | Individuals (as opposed to businesses) will only be able to claim an itemized deduction of up to $10,000 ($5,000 for a married taxpayer filing a separate return) for the total of state and local property taxes and state and local income taxes. To avoid this limitation, pay the last installment of estimated state and local taxes for 2017 no later than December 31, 2017, rather than on the 2018 due date. Be aware that, even if paid in 2017, the state taxes may not be deductible if you are subject to the Alternative Minimum Tax (AMT).
CHARITABLE CONTRIBUTIONS | The itemized deduction for charitable contributions won't be chopped. Because most other itemized deductions will be eliminated in exchange for a larger standard deduction (e.g., $24,000 for joint filers), charitable contributions after 2017 may not yield a tax benefit for many because they won't be able to itemize deductions. If you think you will fall in this category, consider accelerating some charitable giving into 2017. If you have the opportunity to pay for your sporting event tickets (e.g. TAF fees) you should consider doing so before December 31, 2017 since these will not be allowed under the new law.
HOME MORTGAGE INTEREST | Home mortgage interest will be limited for debt acquired after December 15, 2017 to $750,000 and will disallow interest on home equity line of credit previously allowed. If you think you may be limited to the new standard deduction going forward, you may want to consider making an extra mortgage payment before December 31, 2017 to take advantage of the additional interest deduction you can still claim in 2017.
MEDICAL EXPENSES | The new law temporarily boosts itemized deductions for medical expenses. For 2017 and 2018 these expenses can be claimed as itemized deductions to the extent they exceed a floor equal to 7.5% of your adjusted gross income (AGI). Before the new law, the floor was 10% of AGI with the exception of taxpayers age 65 or older, for whom it was 7.5%. Keep in mind that next year many individuals will have to claim the standard deduction because many itemized deductions have been eliminated. If you won't be able to itemize deductions after this year but will be able to do so this year, consider accelerating "discretionary" medical expenses into this year. For example, before the end of the year, get new glasses or contacts, or see if you can squeeze in expensive dental work such as an implant.
Here are some other last-minute moves that can save tax dollars in view of the new tax law:
ALTERNATE MINIMUM TAX | The new law substantially increases the alternative minimum tax (AMT) exemption amount, beginning next year. There may be steps you can take now to take advantage of that increase. For example, the exercise of an incentive stock option (ISO) can result in AMT complications. If you hold any ISOs, it may be wise to postpone exercising them until next year. For various deductions (e.g., depreciation and the investment interest expense deduction), the deduction will be curtailed if you are subject to the AMT. If the higher 2018 AMT exemption means you won't be subject to the 2018 AMT, it may be worthwhile, via tax elections or postponed transactions, to push such deductions into 2018.
LIKE-KIND EXCHANGES | Like-kind exchanges are a popular way to avoid current tax on the appreciation of an asset, but after December 31, 2017, such swaps will be possible only if they involve real estate that isn't held primarily for sale. If you are considering a like-kind swap of other types of property, do so before year-end. The new law says the old, far more liberal like-kind exchange rules will continue to apply to exchanges of personal property if you either dispose of the relinquished property or acquire the replacement property on or before December 31, 2017.
ALIMONY | Under current rules, alimony payments generally are an above-the-line deduction for the payor and included in the income of the payee. Under the new law, alimony payments aren't deductible by the payor or includible in the income of the payee, generally effective for any divorce decree or separation agreement executed after December 31, 2018.
BUSINESS ENTERTAINING | If you've been thinking of entertaining clients and business associates, do so before year-end. Under current law, businesses have been able to deduct 50% of the cost of entertainment directly related to or associated with the active conduct of a business. For example, if you take a client to a nightclub after a business meeting, you can deduct 50% of the cost if strict substantiation requirements are met. Under the new law, for amounts paid or incurred after Dec. 31, 2017, there's no deduction for such expenses.
MOVING EXPENSES | The new law suspends the deduction for moving expenses after 2017 (except for certain members of the Armed Forces) and suspends the tax-free reimbursement of employment-related moving expenses. If you're amid a job-related move, try to incur your deductible moving expenses before year-end, or if the move is connected with a new job and you're getting reimbursed by your new employer, press for a reimbursement to be made to you before year-end.
EMPLOYEE EXPENSES | Under current law, various employee business expenses, e.g., employee home office expenses, are deductible as itemized deductions if those expenses plus certain other expenses exceed 2% of adjusted gross income. The new law suspends the deduction for employee business expenses paid after 2017. We should determine if paying additional employee business expenses in 2017, that you would otherwise pay in 2018, would provide you with an additional 2017 tax benefit.
We have only touched on some of the aspects of the bill here. Be on the lookout for additional detail analysis of the various aspects to the Tax cuts and Jobs act.
If you have any questions or would like to request information regarding sales and other tax services provided by Faulk & Winkler, please contact our office at (225) 927-6811.