Tax Reform: Last Minute Tax Moves
Tax reform is on the way. At Stopp & VanHoy we are on top of the changes and will have complete coverage of all the planning you need for your business. The tax law will be effective for the 2018 tax year. That means there is still time to make last minute changes in 2017 that could have a significant tax impact for you.
The Tax Cuts and Jobs Act will reduce tax rates for many taxpayers. Additionally, many businesses, including those operated as passthroughs, such as partnerships, may see their tax bills cut. The strategy is to take advantage of lower tax rates next year by deferring income into next year.
Take a look at the suggestions listed below and see if any one of these last minute moves are ones you should be making:
Roth Conversions – If you normally convert your regular IRA to a Roth IRA, postpone your move until next year. That way you can take advantage of the lower tax rates in 2018. If you have already completed your Roth Conversion this year, there is still hope! You can unwind the conversion by completing a Roth recharacterization. However, you must complete the recharacterization by year-end. As part of the new tax law, Roth recharacterizations will no longer be available starting in 2018.
Businesses – If you are one of the many small businesses that operate on the cash method of accounting (which means income is taxed when your clients pay), then you might want to hold off on sending those invoices to clients until after year-end. Payments collected in 2017 will be taxed under the 2017 tax rates. Whereas payments collected in 2018 will be taxed under the lower 2018 tax rates.
Changes in Itemized Deductions
The new tax law reduces many popular itemized deductions for a bigger standard deduction. Here are moves you can make now to take advantage of the new law.
Tax Deductions – Individuals 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 (1) state and local property taxes; and (2) state and local income taxes. To avoid this limitation, pay the last installment of estimated state and local taxes for 2017 no later than Dec. 31, 2017, rather than on the 2018 due date. But, don’t prepay in 2017 a state income tax bill that will be imposed next year – Congress says such a prepayment won’t be deductible in 2017. However, Congress only limited 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 OK.
Charitable Contributions – The itemized deduction for charitable contributions won’t be removed or decreased. However, since 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 – The new law temporarily boosts itemized deductions for medical expenses. For 2017 and 2018 these expenses can be claimed as itemized deductions to the extent they exceed a floor equal to 7.5% of your adjusted gross income (AGI). Before the new law, the floor was 10% of AGI, except for 2017 it was 7.5% of AGI for age-65-or-older taxpayers. But keep in mind that next year many individuals will have to claim the standard deduction because, for post-2017 years, many itemized deductions will be eliminated, and the standard deduction will be increased. If you won’t be able to itemize deductions after this year, but will be able to do so this year, consider accelerating “discretionary” medical expenses into this year. For example, before the end of the year, get new glasses or contacts, or see if you can squeeze in expensive dental work such as an implant.
Employee Business Expenses – Under current law, various employee business expenses, e.g., employee home office expenses, are deductible as itemized deductions if those expenses plus certain other expenses exceed 2% of adjusted gross income. The new law suspends the deduction for employee business expenses paid after 2017. So, we should determine whether paying additional employee business expenses in 2017, that you would otherwise pay in 2018, would provide you with an additional 2017 tax benefit. Also, now would be a good time to talk to your employer about changing your compensation arrangement—for example, your employer reimbursing you for the types of employee business expenses that you have been paying yourself up to now, and lowering your salary by an amount that approximates those expenses. In most cases, such reimbursements would not be subject to tax.
As an individual taxpayer, these are a few of the tax saving moves you can make before year-end. If you own a business, even more avenues are available. The common theme is to take deductions now as certain deductions are going away as well as deferring income into later years to take advantage of lower tax brackets.
Keep a lookout for our next communications as we go into more detail on these new rules and how the new rules can be used to your benefit.