Congress has recently passed the largest tax reform legislation in over thirty years. The legislation makes fundamental changes in the way federal taxes are calculated for both businesses and individuals. Most of the changes will go into effect starting in 2018, but there is still time before the end of the year for some last minute 2017 tax planning.
Lower tax rates are coming in 2018. The Tax Act will reduce tax rates for many taxpayers beginning in 2018. Additionally, those who operate their businesses through passthrough entities such as S corporations and partnerships as well as sole proprietorships may also see a reduction in their taxes.
In the meantime, below are some items you should consider doing prior to the end of the year:
As the tax rates will be going down and certain expenses will be eliminated or reduced, the year- end planning opportunities will focus on deferring income and accelerating expenses. Below are some of the things that can be done to defer income and accelerate deductions.
If you are considering converting a regular IRA to a Roth IRA, postpone the conversion until next year.
If you have already converted a regular IRA to a Roth IRA this year and now question whether it was a good idea as the tax on the conversion will be subject to a lower tax rate next year, you can unwind the conversion to the Roth IRA by doing a recharacterization-making a trustee-to-trustee transfer from the Roth to a regular IRA. This way, the original conversion to a Roth IRA will be cancelled out. But you must complete the recharacterization before year-end. Starting in 2018 you will no longer be able to use a recharacterization to unwind a regular-IRA-to-Roth-IRA conversion.
If you run a business that renders services and operates on the cash basis, the income you earn isn't taxed until you are paid. You may consider waiting to bill until next year, or until a time when there is no chance you will receive the cash in 2017.
If your business is on the accrual basis, deferral of income till next year is difficult but not impossible. For example, you might, taking into account business considerations, be able to postpone completion of a last-minute job until 2018, or defer deliveries of merchandise until next year. Taking one or more of these steps would postpone your right to payment, and the income from the job or the merchandise until next year. Keep in mind since the rules in this area are complex we recommend that you first consult with your tax advisor for his or her input.
The reduction or cancellation of debt generally results in taxable income to the debtor. If you are planning to make a deal with creditors involving debt reduction, consider postponing this action until January to defer any debt cancellation income into 2018.
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 (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. The Tax Act included a provision that will not allow you to prepay your 2018 state income taxes but did not put such a limitation on property taxes, so a prepayment on or before Dec. 31, 2017, of your first 2018 property tax installment is apparently OK.
The deduction for charitable contributions will not be changed. But as 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 taxpayers because they won't be able to itemize. If you think you will fall in this category, consider making your 2018 contributions in 2107.
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, (for 2017 it was 7.5% of AGI for age-65-or-older taxpayers). But keep in mind that next year many individuals will end up claiming the standard deduction as many of their after this year, but will be able to do so this year, consider accelerating to the extent possible 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 some dental work you were contemplating having done.
Other items to consider:
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. For example, the exercise of an incentive stock option (ISO) can result in taxable income for AMT purposes So, if you hold any ISOs, it may be wise to postpone exercising them until next year. And, for various deductions, e.g., depreciation and the investment interest expense deduction, the deduction 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 to push such deductions into 2018.
Like-kind exchanges are a popular way to avoid current tax on the appreciation of an asset, but after Dec. 31, 2017, such exchanges will be possible only if they involve real estate. If you are considering a like-kind exchange of other types of property, do so before year-end. The new law says the old 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.
Meals and Entertainment. Businesses have been able to deduct 50% of the cost of entertainment directly related to or associated with the active conduct of a business. For example, if you take a client to a nightclub after a business meeting, you can deduct 50% of the cost as long as the business substantiation requirements are met. Under the new law, for amounts paid or incurred after Dec. 31, 2017, there's no deduction for such expenses. If you've been thinking of entertaining clients and business associates, do so before year-end.
Alimony payments generally are a deduction for the payor and included in the income of the payee. Under the new law, alimony payments aren't deductible by the payor or includible in the income of the payee, generally effective for a divorce decree or separation agreement executed after 2017. If you're in the middle of a divorce or separation agreement, and you'll wind up on the paying end, it would be worth your while to wrap things up before year end. On the other hand, if you'll wind up on the receiving end, it would be worth your while to wrap things up next year.
The new law suspends the deduction for moving expenses after 2017 (except for certain members of the Armed Forces), and also suspends the tax-free reimbursement of employment-related moving expenses. If you're in the process of a job-related move, try to incur your deductible moving expenses before year-end, or if the move is connected with a new job and you're getting reimbursed by your new employer, press for a reimbursement to be made to you before year-end.
Unreimbursed employee business expenses such as automobile expenses and 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. You will need to 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.
Please keep in mind that we have described only some of the year-end planning opportunities 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 call us at 310.477.3924 and ask for any of our tax partners.
Firm Lead Tax Partner SCupingood@SingerLewak.com