Congress is enacting 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 tax moves you should think about making.
Lower tax rates coming. The Tax Cuts and Jobs Act will reduce tax rates for many taxpayers, effective for the 2018 tax year. Additionally, many businesses, including those operated as pass-through entities, such as partnerships, may see their tax bills cut.
The general plan of action to take advantage of lower tax rates next year is to defer income into next year. Some possibilities follow:
- If you are about to convert a regular IRA to a Roth IRA, consider postponement until next year.
- If you already converted a regular IRA to a Roth IRA consider re-characterization back to a regular IRA and reconvert next year. However, you must do so before this year-end as “re-characterization” has been repealed.
- Cash basis service business owners: hold off on billings until next year—or until so late in the year that no payment will likely be received this year.
- Accrual-based business owners: deferral of income till next year is difficult but not impossible. With due regard to business considerations, consider postponing completion of a last-minute job until 2018, or defer deliveries of merchandise until next year (if doing so won’t upset your customers). Keep in mind that the rules in this area are complex, therefore, we are here to offer our professional input.
Disappearing or reduced deductions, larger standard deduction. Beginning next year, the Tax Cuts and Jobs Act suspends or reduces many popular tax deductions in exchange for a larger standard deduction. Here’s what you can do about this right now:
- State and local taxes – income and property 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 these taxes. Therefore, consider the following:
- Pay the installment of estimated state and local income tax normally due in January, no later than Dec. 31, 2017.
- If you anticipate additional state and local taxes being due for 2017 that you would normally pay when you file in April, consider increasing the above estimate installment by that amount.
NOTE: Deducting prepayments of 2018 state and local income taxes are specifically prohibited and are not deductible in 2017.However, Congress only forbade prepayments for state income taxes, not property taxes, so a prepayment on or before Dec. 31, 2017, of a 2018 property tax installment is apparently okay.
Also, beware that if you are normally subject to the Alternative Minimum Tax (AMT), prepaying these taxes may not benefit you.
- Charitable contributions: 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.
- Medical expenses: Deductible as an itemized deduction to the extent they exceed 7.5% of your adjusted gross income (AGI). Again, if you won’t be able to itemize deductions after this year due to the increase in the standard deduction, but will be able to do so this year, consider accelerating “discretionary” medical expenses into this year.
Other year-end strategies. Here are some other last minute tax moves that can save tax dollars in view of the new law:
- AMT: 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.
- If you hold incentive stock options (ISOs), it may be wise to postpone exercising them until next year.
- Various deductions, e.g., depreciation and the investment interest expense, 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 of personal property: Going away beginning in 2018 – however, 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 Dec. 31, 2017.
- Entertainment: If you’ve been thinking of entertaining clients and business associates, do so before year-end. These deductions are going away for amounts paid or incurred after Dec. 31, 2017.
Please keep in mind that this list is certainly not all inclusive and describes only some of the last minute tax moves that should be considered in light of the new tax law. If you would like more details about any aspect of how the new law may affect you, please do not hesitate to contact us.