The Republican Congress is in the process of passing the Tax Cut and Jobs Act, a new tax law. President Trump is expected to sign it by Christmas.
The law was created and passed hastily and affects many aspects of the federal tax code, so many details are still not clear. Furthermore, regulations have yet to be issued. Also, while the provisions affecting corporations are permanent, most affecting individuals expire in 2026. Thus, tax planning is complicated.
How do you plan? Very carefully – you need to augment your traditional year-end planning by anticipating the impact of the many changes.
Note: many proposed changes did not make the final law, so be sure you are referring to the final version when making your planning decisions!
First, be practical:
- Determine what income and deductions you can move from 2017 to 2018 or vice versa.
Second, review the impact:
- What happens if you shift any of these amounts of income and deductions to the other year?
Finally, watch for the impact of the Alternative Minimum Tax (“AMT”):
- The exemption for the AMT and the threshold above which that exemption gets phased out both rise next year, so some deductions lost to the AMT in 2017 could have value in 2018. Others simply vanish next year, so you need to plan carefully!
The new law lowers the tax brackets, so income will be generally subject to less tax in 2018.
Conclusion: You probably want to move income to next year if you can.
Exemptions and standard deduction
The new law eliminates personal exemptions and raises standard deductions to $12,000 for single filers and to $24,000 for married couples. These amounts will be indexed for inflation. The increased standard deduction may offset deductions that you lose, as discussed below. If you have children and others who are dependents, those tax credits are increased, which may help as well.
Conclusion: You probably want to move itemized deductions to 2017.
Itemized Deductions and Credits
The deduction for property taxes and for state and local income taxes is capped at $10,000.
Mortgage interest on new home purchases is deductible only for loans of up to $750,000 used to purchase your primary residence. Interest on home equity loans will not be deductible. (It is not clear if converting any part of home equity indebtedness that was used to purchase or improve your primary residence to a mortgage would make that interest deductible, subject to the cap.)
All miscellaneous deductions are eliminated. This includes investment and tax preparation fees, safe deposit box charges and unreimbursed employee expenses.
The casualty loss deduction is also eliminated and the bike to work exclusion ends.
Moving expenses will no longer be allowed (except for military personnel in certain cases).
The deduction of alimony will be eliminated for divorces occurring after 2018.
What survived? The deduction of student loan interest and medical expenses survived. The latter is subject to a 7.5% rather than a 10% floor. And, the new law repeals the reduction applied to itemized deductions for high-income taxpayers, which may help with some deductions.
Here are several items that were considered for limitation or elimination that remain unchanged:
Dependent care accounts, adoption expenses, tuition waivers and employer paid tuition, capital gains on the sale of your personal residence, the teacher deduction, electric car credit, Archer medical accounts and designating shares of stock or mutual funds sold.
Conclusion: you will want to move any of the eliminated deductions that you can prepay into 2017.
Note: a last-minute provision added to the new law makes prepaying 2018 income taxes in 2017 non-deductible.
If you have income from a sole proprietorship, LLC, partnership or S Corporation, you may be able to deduct 20% of that income, subject to certain rules on wages and a phaseout beginning at $157,500 for singles and $315,000 for married taxpayers. These rules are designed to avoid abuse seen when Kansas enacted a similar law.
Conclusion: read the fine print to see if there are any opportunities you can exploit.
The credit before estate or gift taxes are due is doubled to $10,000,000, indexed for inflation.
Conclusion: you may want to postpone your year-end gift planning.
Carefully review any income and deductions that you can still shift to see if moving will lessen the total taxes you pay for 2017 and 2018.
Good luck and best wishes for the holidays!