On December 22, 2017, President Trump signed into law the Tax Cuts and Jobs Act of 2017. The Act generally provides for lower tax rates for individuals and businesses while eliminating certain deductions. See the Tax Alert on our website for more details on specific provisions included in the new Act. While most of the provisions won’t go into effect until 2018 taxpayers should be looking at what steps they can take in the remainder of 2017 to minimize their total tax bill between the two years. Below is a discussion of a few general planning opportunities and items to consider. Note that every taxpayer’s situation is different and not every action will benefit all taxpayers.
Deferral of ordinary income. This basic tax planning strategy is especially relevant this year with many taxpayers expected to have lower marginal tax rates next year under the new bill. A few suggestions include:
- If you are an employee who thinks a bonus is coming your way before year end, consider asking your employer to delay payment of the bonus until next year.
- If you are thinking of converting a regular IRA to a Roth IRA, postpone the change until next year.
- If you run a service business that operates on the cash basis, consider delaying billings to ensure that payments are not received until next year.
Acceleration of itemized deductions. In general, accelerating deductions to take advantage of the higher 2017 brackets is a good idea but itemized deductions present a special opportunity this year. Under the new bill the standard deduction will nearly double (to $12,000 for a single taxpayer and $24,000 for a joint return). As a result, many taxpayers who currently claim itemized deductions will no longer meet the threshold for doing so in 2018. Consider prepaying your January 2018 mortgage payment by the end of the year, accelerating charitable contributions, and paying medical expenses if you have high enough expenses to claim a deduction.
Pay state and local income taxes in 2017. Taxpayers should also pay any 2017 state and local income taxes by year end assuming such payment does not subject them to the Alternative Minimum Tax (AMT). Under the new bill, beginning in 2018 the deduction for state and local taxes (which includes real estate taxes) is limited to $10,000. Paying your entire 2017 liability before the end of the year not only taxes advantage of the higher rates but preserves the deduction. It is worth noting that the committee report specifically states that taxpayers cannot prepay their 2018 state and local income taxes in 2017 in order to get a 2017 deduction. Any such payments will be treated as a 2018 deduction and subject to the $10,000 cap. Also note that the IRS has just weighed in on prepaying 2018 real estate taxes. It stated that payments are not deductible until the taxing authority has assessed the tax.
Accelerate long-term capital gain income. Capital gain rates stay the same under the new bill. The advantage of triggering long-term capital gain income in 2017 is the ability to pay the state tax on the gain in 2017 and get the deduction assuming you are not in AMT.
Year-end Capital investment planning. The conference bill makes significant changes to the asset expensing provisions under section 179 and additional first year depreciation (bonus depreciation). If you are looking to make significant asset purchases in your business, it’s important to review the benefits of acquiring and placing in service these assets before the end of the year. Some considerations would include being able to reduce higher bracket income, the possibility of creating losses in 2017 which would be grandfathered in under current Net Operating Loss (NOL) provisions, and exclusion from new excess business loss rules. Additional consideration should be given to the effect of asset expensing on the new deduction for pass-through income starting in 2018.
Pay entertainment, moving and employee transportation fringe benefits before 2018 Expenses for entertainment, employee moving and relocation and employee transportation fringes (parking, commuter tickets, etc) are no longer deductible as of January 1, 2018. Taxpayers should review their already incurred expenses (including reimbursements to employees) before year end and pay (for cash basis taxpayers) the outstanding balance to secure deduction in 2018. To the extent practical, taxpayers may wish to incur expenses e.g. buy tickets to events, prepay parking/commuter plans, before end of the year.
Plan for lower corporate income tax rate For tax years beginning after December 31, 2017, the corporate tax rate is reduced to a flat 21 percent. The rate is no longer a graduated rate. This means corporations whose income hovered around the $50,000 limit, will now see their marginal rate increase under the Act. Taxpayers should consider bringing income into the 2017 tax year (but not exceeding a 21 percent effective rate) to benefit from a lower tax rate.
Maximize domestic production activities deduction The 199 deduction (DPAD) is repealed for tax years beginning after December 31, 2017. C Corporation taxpayers should review the benefit of accelerating qualifying income into the 2017 tax year and increasing the deduction vs the potential cost of higher graduated tax rates. Taxpayers, other than C Corporations, should review the same benefit but also factor in the potential benefit for the New 20 percent deduction on pass-through income for tax years beginning after December 31, 2017.
Review deduction for pass-through income The Act creates a new deduction for pass-through business income for tax years beginning after December 31, 2017. The new deduction gives eligible taxpayers more incentive to defer qualifying income into 2018 and accelerate deductions into 2017. However, some taxpayers with business income from one of the specified service trades or businesses should consider the possibility of accelerating income into 2017 to manage taxable income to stay below established income thresholds.
Consider delaying the purchase of luxury automobiles until 2018. If you are in the market to purchase a passenger automobile (under 6,000 lbs) for your business it may be beneficial to wait until next year. The depreciation limits for passenger autos placed in service in 2017 are $3,160 for the first year, $5,100, and $3,050 for the second and third years and just $1,875 for subsequent years. There is also an $8,000 additional first year depreciation allowance available for new vehicles. The limits for autos placed in service in 2018 for which the $8,000 additional first year depreciation is not taken are $10,000 for the first year, $16,000 and $9,600 for the second and third years and $5,760 for subsequent years.
In this climate of uncertainty, we encourage you to check our website for updates on the state of tax reform and related planning ideas. Additionally, you can always contact your Hertzbach tax advisor for up-to-date planning opportunities tailored to your personal situation.