Congress has released the conference committee report detailing the specifics of the tax bill they hope to vote on this week and have signed into law by year-end. The tax bill generally provides for lower tax rates for individuals and businesses while eliminating certain deductions.
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. 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 takes 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.
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.
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 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.