2018 year-end tax planning – Part III on using the new tax law to save you money

In our first part, we discussed the impact of the new law on personal taxes, and in our second part, we discussed planning for small businesses. In this part, we give you a guide for year-end moves to reduce total taxes between 2018 and 2019. Can you act at all? Review the changes in itemized deductions

Each year, we advise that you be practical, focusing on where you can actually make moves. For many, the new $24,000 standard deduction for married couples, $12,000 for single taxpayers, means you will not itemize (i.e., your total for itemized deductions is less than the standard amount). If you are not itemizing, you have fewer ways in which to affect change in the taxes due in either year (you can also stop collecting receipts for those deductions!).

Some possible deduction strategies

One technique for getting around the limit is to bunch deductions from two or more years into one year. The only deduction that you can really move is charitable donations, because your state, local and real estate taxes are limited to a $10,000 maximum and you cannot accelerate, or delay, significant amounts of mortgage interest.

If you do not want any one charity to receive the full amount in one year, then donate to a donor advised fund from which you may be able to designate donations to particular charities in future years.

If you are 70½ or older, you have the option of distributing up to $100,000 from your IRA or other qualified plan to an IRS- approved charity, and having none of the distribution taxed.

The deduction of unreimbursed business expenses was terminated by the new tax law. One possible strategy is to form an LLC or S Corp., report the business expenses on form 1065 or 1120S, and then take those on Schedule E to offset other income. You will need a valid business purpose to form the LLC or S Corp. and take expenses.

You may also be able to report business expenses on Schedule C as relating to self-employment. Again, you must have a valid business purpose. Also, the IRS could apply the hobby loss rule to disallow the deductions, if you do not show a profit for the business in two out of five years. Thus, it is best to consult with an attorney before trying any of these ideas.

The tax planning steps

If you are able to itemize, determine what income and deductions you can move from 2018 to 2019 or vice versa. You want to minimize total taxes for both years. Make sure your planning includes the 3.8% Medicare tax on high income and review Roth conversions. And review our post on planning under 199A for QBID.

Next, review the impact of moving income and expense to see what happens if you shift any of these amounts from one year to the other year.

Finally, watch for the Alternative Minimum Tax (“AMT”):

  • The exemption for the AMT and the threshold above which that exemption gets phased out both rise for 2018, so fewer taxpayers will owe the AMT.

Capital gains

Review your unrealized losses to see if you can shelter gains, reducing your total taxable income. If you have more losses than gains, you can take up to $3,000 of capital losses against other income. If you sell an asset that would prefer to retain, in order to realize gains in 2018, make sure you do not run afoul of the wash-sale rule (any loss on an asset that you repurchase in 30 days will be disallowed, so you have to either wait or buy a similar asset that fits your asset allocation while not counting as a wash sale).

If you have net gains, consider using appreciated stock for charitable donations – that way you avoid the tax on the gain while still getting the full fair market value for your charitable donation.

  • One note of caution: many mutual funds will make capital gains distributions to shareholders in December. Shareholders may be surprised on the amount of taxable gain, even for funds that had little net appreciation.

More on itemized deductions 

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, except when the home equity indebtedness is used to purchase or improve your primary residence.

As you may recall, all miscellaneous deductions were eliminated. This includes investment and tax preparation fees, safe deposit box charges and unreimbursed employee business expenses. And moving expenses are no longer allowed (except for military personnel in certain cases).

Under the new law, medical expenses are subject to a 7.5% threshold before becoming deductible.

More year-end planning

While you review your taxes, consider reviewing your estate plan and beneficiary designations. The federal exemption doubled to just over $11 million in 2018, so fewer people will owe any federal estate tax. However, many states still impose estate taxes on smaller estates. If you have “excess wealth” and want to reduce your taxable estate by gifting assets to children or others, you can give $15,000 per person, per year now. If your spouse joins you, that is $30,000 per person.

If you do review your estate plan documents, also review beneficiary designations to make sure everything is current. And review your medical directive and durable power of attorney.

If you have not maxed-out your 401(k) plan, IRA,Health Savings Account or flex plan account, consider doing so before the end of the year.

Summary

Carefully review any income and deductions that you can still shift to see if moving will lessen the total taxes you pay for 2018 and 2019.

Good luck and best wishes for the holidays!

Facebook page for our law firm

We are excited to announce the Facebook page for our law firm.

We hope you use this to keep informed about changes in the tax law and other financial planning issues.

Please check it out and “like” the new page.  Also, feel free to give us feedback.

Thank you

2017 year-end tax planning – a year of uncertainty (updated)

(as also seen online at IRIS)

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!

Planning steps

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!

Income

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.

Pass-through businesses

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.  (Watch for a post on this soon.)

Conclusion: read the fine print (e.g. rules for personal service firms) to see if there are any opportunities you can exploit.

Estate taxes

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.

Summary

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!

If you have any questions, please contact me.

Tax Law change under the new Trump Administration? Maybe, but too soon for planning

Enacting Major Changes Will Take Time

(as also appeared online in IRIS.xyz)

President Trump made tax reform a key issue in his campaign. He is now president and Republicans are in charge of the House and Senate, so the likelihood of overhauling the federal tax system is better than they have been for decades.

However, President Trump and Congress are trying to enact changes to the Affordable Care Act as well as addressing budget issues and foreign relations. Also, dealing with all the recent hearings involving the FBI have diverted attention. Finally, there are many details that need to be worked out, making it unlikely that major changes will happen until 2018.

Change in IRS Regulations

President Trump has already made changes in IRS regulations. On his first day in office, he temporarily froze tax regulations and then shortly thereafter, ordered that two existing regulations had to be removed for each one that was added. What is the impact?

  • The Trump administration has stated that the two-for-one exchange rule only applies to significant regulatory actions. The rule may not affect the many IRS regulations that are procedural in nature or are needed by taxpayers.
  • One new regulation that has been threatened is the Department of Labor’s new fiduciary rules for retirement advisers. This updated regulation requires retirement advisers to act in their clients’ best interests, which is a stricter standard than was previously required.
  • Also affected are the new partnership audit procedure. A 2015 law streamlined the exam process of large partnerships. The IRS released proposed regulations which implemented the regime on January 18. However, it later pulled the regulations in response to the freeze.

Possible Tax Law Changes – Lower Corporate Tax Rate

Currently, the corporate tax rate tops out at 35%. House Republicans want to lower it to 20% with 25% for businesses that pass income through their owners and for those that are self-employed. President Trump is calling for a 15% corporate tax. In 2014, nearly 25 million Americans filed taxes as sole proprietors (Schedule C), so the change affects many taxpayers.

Tax strategy: Under this change, individuals who are high-earning could become independent contractors or set up LLCs to shift income and advantage of the lower corporate tax rate. Additionally, those who own pass-through businesses could reduce their salaries and take higher profits.

This is how residents of Kansas responded to a similar state law. The state is now working to repeal a law passed in 2012 that exempted pass-through firms from state income tax. The result was that many individuals and businesses in the state restructured their business as pass-through entities or created new businesses to take advantage of the tax break. In just a few years, the number of pass-throughs in the state almost doubled. The state is now facing a large budget deficit as a result because the pass-through exemption is estimated to have cost the state $472 million in 2014 alone. The cost for 2015 was even higher.

The impact of this tax strategy on the 15% tax at the federal level would be expensive. It is estimated to cost up to $1.95 trillion in lost tax revenues over the next ten years. The Trump administration is considering ways to prevent abuse of this low tax rate but any attempt to prevent gaming the system will likely add more complexity to the tax code. Tax-savvy practitioners will likely still be able to find loopholes.

Tax only on Income Earned inside the US

Worldwide income is taxed presently, with credits for foreign taxes paid. The proposed law would generally tax only income that is earned within U.S.

Multinational Tax: A new, low tax on multinationals is part of the proposed tax, added to raise revenue to fund other rate reductions.

Estate Tax Repeal

Republicans would like to repeal the estate tax. President Trump would impose a tax on pre-death appreciation of assets, with a $10 million per couple exemption. There would be no step up in basis at death. And it is likely that gift tax rules would be retained.

Even if the federal estate tax law is repealed, many states will continue to impost a tax. Massachusetts only exempts $1 million of assets passing to someone other than a spouse, such as a trust. New York and other states have higher exemptions. Thus, planning is still important for most people.

Planning Opportunities

With the uncertainty of any change being enacted, this is not an easy year for planning. For example, this may not be the year for a Roth conversion, if tax rates will go down next year. It may not be the time for complex estate planning techniques involving irrevocable transfers, if the estate tax is eliminated in 2018.

We will keep monitoring this to assess any moves that do make sense and update this post when the likelihood of real changes becomes clear.

Year-end planning, 2016 version

The election of Donald J. Trump could have a significant impact on your finances. Individual and corporate tax laws may change, the Affordable Care Act may be eliminated, trade war may ensue, infrastructure building may boost jobs and sectors of the economy, and national defense and diplomacy could lead almost anywhere – your guess is as good as anyone else’s.

So then, how do you incorporate this into year-end planning? Very carefully!

Corporate Taxes

Our analysis starts with a review of his proposal to limit corporate income taxes to 15% as a way to illustrate how tricky planning is:

Analysis of the way this limit applies to pass-through entities suggests that the 10-year cost could be anywhere from $4.4 trillion, assuming owners of pass-throughs pay 33% tax, to $5.9 trillion, assuming owners only pay a 15% tax.

Those are hefty cost numbers, which is why it is tricky to assume that any major tax changes will be enacted in 2017.

Income Taxes

There could be three rates on ordinary income: 12%, 25% and 33%, with the latter starting at $225,001 for married filers and $112,501 for single filers. The 0.9% and 3.8% Affordable Care Act surtaxes on upper-incomers would be eliminated. So would the AMT (“alternative minimum tax”). The 20% maximum capital gains tax would remain. Standard deductions would go up, personal exemptions would be eliminated and breaks for dependent care would be increased.

Check here for 2017 tax rates.

Estate taxes

The President Elect has revised his estate tax proposal, calling now for pre-death tax on appreciation in assets of large estates, subject to a $10-million-per-couple exemption. This may be accomplished by limiting the step-up in basis for heirs who inherit capital assets from large estates.

Another change would be elimination of the IRS’s proposal to restrict the use of valuation discounts for gift and estate tax purposes on intrafamily transfers of closely held firms.

Investing and retirement

Infrastructure building could boost certain investments, while conflicts on trade agreements could hurt many.

His proposed tax changes for retirement plans include extending the age for which contributions to IRAs are allowed and delaying required minimum distributions (RMDs).

Okay, enough, how does one act now?

Some moves still make sense

Tax plan – deferring income into 2017 and adding deductions to 2016 should work well, unless doing so puts you in the AMT, in which case the reverse will work best.

Most of our suggestions from our 2015 year-end planning post still work, including RMDs, 3.8% Medicare surtax, itemized deductions, stock options, investment income and sole proprietor and small business income. Also check out our estate planning post for more ideas.

If your deductions include donating to charities, gifting appreciated assets leverages your donation. That is, you can avoid the income tax on capital gains while still benefiting from the charitable deduction. Watch for the rules on exceeding 30% of your adjusted gross income and donating to private charities.

Research Your Charities

Check out websites like such as ImpactMatters and GiveWell to make sure what you donate has the best impact. Other tools include Agora for Good, a tool to track donation impact over many sectors.

Investing – your strategy should not be altered in any dramatic way now.

If you do sell mutual funds, be sure to wait to buy replacement funds until after the dividend distribution date, so you do not end up with a taxable distribution on gains in which you did not participate

Summary

Many of the income and estate tax rules may change during 2017. However, for now, your safest plan is to assume little changes and stick to the “traditional” techniques outlined above.

If you have any questions, please contact me!