December is the time of year when many taxpayers take last-minute steps to lower their income tax liability. This year, however, year-end tax planning is proving to be difficult.
As taxpayers think about dotting their I’s and crossing their T’s as 2017 comes to a rapid close, there is one big item up in the air: a major tax reform bill.
The Senate just approved the most comprehensive tax reform proposal in 30 years, and we’re now waiting for the House and Senate versions of the bill to be reconciled before going to President Trump’s desk to be signed into law.
While the changes brought about by the tax reform bill are not expected to apply to the 2017 tax year, there are provisions in the bill that make certain year-end tax planning strategies for 2017 especially important.
Let’s take a look at several steps you can take now to take advantage of current tax laws, and position yourself for the changes that are coming down the pipeline.
Individual Tax Rates
The new Senate tax bill calls for lowering the current individual tax rates to 10%, 12%, 22%, 24%, 32%, 35% and 38.5%. The House tax bill only calls for four individual tax rates: 12%, 25%, 35% and 39.6%.
The following tables, published in a blog post by Business Insider, show current and proposed tax brackets for single and married filers.
The current highest individual tax rate is 39.6%. While we don’t know what the final tax rates will look like and how many brackets there will be, all indicators point to lower tax rates under the new law in future years. With that in mind, it’s advantageous for your income to be as low as possible in 2017. The two most common strategies for lowering your income are deferring income and accelerating deductions.
How to Defer Income
There are numerous ways to defer income. For example, you can:
- Delay the sale of appreciated assets until 2018
- Postpone client billing until late December if you are self-employed
- Wait to take retirement plan distributions other than required minimum distributions if you are retired
These are just a few ways to defer income. If you are unable to defer income to 2018, then you might be able to accelerate your deductions in 2017. Either one of these approaches can help lower your income (thereby reducing your tax liability) for 2017, while looking forward to lower tax rates in 2018. Your CPA can work with you to identify the best strategies for your situation.
How to Accelerate Deductions
Planning for deductions is a little more difficult due to Adjusted Gross Income (AGI) phase-out levels, the alternative minimum tax (AMT) and your tax filing status. Regardless, accelerating deductions can be a highly effective personal income tax planning tactic.
Let’s look at some ways to accelerate your deductions.
Consider making your 2017 fourth quarter state and local estimated tax payments in December 2017 rather than near their due date in January 2018. This tactic may prove especially important in 2017 because both the House and Senate versions of the tax bill include provisions for eliminating the ability to deduct your state and local income taxes paid.
If you do not pay your property taxes through escrow, consider paying your property tax installment in December 2017. Under the new law, property taxes paid may be eliminated or restricted to a maximum deduction of $10,000.
Medical expenses might be another means to accelerate your deductions. Amounts paid for qualifying medical expenses and health insurance premiums are deductible to the extent that they exceed 10% of your AGI. This is a deduction that will most likely be eliminated under the new tax law. Therefore, you should consider incurring all possible medical expenses in 2017. (Side note: the tax proposal also includes a repeal of the individual mandate to buy health insurance.)
The deduction for mortgage interest paid might change under the new law. Under the Senate tax proposal, you would still be able to claim a deduction for interest paid on mortgage debt up to $1,000,000. However, the House’s proposal calls for a reduction of the cap of mortgage debt to $500,000. The Senate proposal also disallows deductions for interest paid on home equity loans. Maximizing retirement contributions and HSA contributions may be an advantageous move to accelerate deductions in 2017 to help lower your income.
Consider making extra charitable contributions before December 31, 2017. Remember that you can make these donations with cash, credit card or even property such as household items, cars and investments. Property donated to charity is deductible at its fair market value at the date of donation. It’s worth noting that the new tax law proposes doubling the standard deduction to $24,000 for married taxpayers filing jointly and $12,000 for single filers.
Carry Back Your Net Operating Loss
If your business incurs a net operating loss (NOL) in 2017, you may carry back that loss against taxable income going back to the two previous years. Depending on the outcome of the reconciliation, the tax law might restrict the NOL carryback provisions beginning in 2018.
What Else Is In the Tax Bill?
Exemptions
Looking ahead to other changes the new tax law might bring, you’ll likely see the elimination of personal exemptions as well as exemptions for dependents. There is a proposal to increase the child tax credit to $2,000 (from $1,000) per child and it would be available for children under the age of 18 (up from 17). This would revert back to children under the age of 17 in 2025. The child tax credit has been greatly expanded under the Senate law proposal to include a new phase out to begin at $500,000 for married tax filers (up from $110,000).
Alternative Minimum Tax
The House tax proposal calls for the elimination of the AMT but the final version of the Senate bill keeps the AMT in place and raises the amount of income exempt from it. The AMT is a topic that will be watched closely while the tax proposal is finalized between the House and the Senate.
Investment Tax
The House and Senate tax bills contain very few changes to the treatment of both short term and long term capital gains. Also, the proposals do not call for the elimination of the net investment income tax. Short term capital gains on property held less than one year would remain virtually the same and be taxed at your ordinary income tax rate, which could be lower under the new law. Long term capital gains on property held for more than one year would most likely remain similar to how it is treated under current law.
Estate Tax
Under current tax law, estates up to $5.5 million are exempt from taxes. The House proposal raises that number to $10 million and would increase the exemption every year and eventually eliminate the estate tax after six years. The Senate proposal leaves the tax in place for estates over $11 million with no date to repeal the tax.
Download our free Estate Planning Scorecard to find out if your estate plan is up-to-date.
Business Tax
The House and Senate versions of the bill both call for significant reductions in the corporate tax rates. The new proposal calls for a reduction in the top rate of 35% down to 20%. The 20% rate would not take effect until 2019 under the Senate proposal. Both versions of the bill also call for the elimination of corporate AMT.
Under current law, the tax rates for pass-through entities (partnerships, S corporations and sole proprietorships) are calculated at the individual’s tax rate, with the highest rate being 39.6%. The House bill drops the top income tax rate on pass-throughs to 25%, while prohibiting anyone providing professional services (attorneys, CPAs, etc.) from taking advantage of the lower rate. The Senate bill proposes lowering the top income tax rate to 23% and also prohibits the new rate for anyone in a service business, except for those with taxable incomes under $500,000 if married ($250,000 if single).
Both versions of the tax bill allow for more generous expensing rules. The Senate proposal would allow businesses to immediately and fully expense the cost of equipment, except structures, for at least five years. After that, the provision would be phased out by 20% for the next five years. The House proposal calls for the new expensing rules to be eliminated after five years rather than phased out.
What To Do Now
As you can see, year-end tax planning for individuals and businesses in 2017 is especially complex due to the major tax reform bill that is working its way through the legislative process. Regardless of which provisions of the tax reform proposal get passed into law, we recommend working with your CPA to identify ways to reduce your 2017 tax liability.
Need Help?
Contact us online or call 800.899.4623 to get help with year-end tax planning.
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