Congress is working towards passing major tax reform that could potentially make big changes in the way you, your family, and your business calculate your federal income tax bill, and the amount of federal tax you will pay. This letter discusses strategies based on anticipated changes in the law based on current drafts of the House and Senate bills. Keep in mind, however, that no tax bill may pass this year.
Changes to the Federal Estate Tax. Both versions of the tax bill would result in fewer people owing federal taxes at the time of their death. The bill pending before the Senate would double the exclusion to approximately $11 million, up from $5.49 million now. The House-passed bill would also immediately double the exclusion and then ultimately repeal the estate tax by 2024. It is important to continue monitoring changes to the estate tax, and changes to any laws affecting assets at death, to ensure proper planning.
Lower tax rates coming. Both the tax bill passed by the House of Representatives and the version pending before the Senate would reduce tax rates for many taxpayers, effective for the 2018 tax year. Additionally, businesses, including pass-through entities, may also see their tax bills cut, although the final form of the relief isn’t clear right now. Both the House-passed version and the Senate version reduce the corporate tax rate to 20%.
In order to take advantage of lower tax rates, income can be deferred to next year. Here are some potential ways:
- If you run a business that renders services and operates on the cash basis, the income you earn is not taxed until your clients or patients pay. One way to delay payment is to postpone billings until next year, or until later this year so that payment is not likely to be paid until next year. By doing this, your income will hopefully be taxed at a lower rate.
- You should keep in mind that the reduction or cancellation of debt generally results in taxable income to the debtor. So if you are planning to make a deal with creditors involving debt reduction, you should consider postponing action until the beginning of next year in order to defer any debt cancellation income.
- If you are considering converting a regular IRA to a Roth IRA, you should postpone your move until next year. By postponing, you will defer income from the conversion until next year.
Disappearing deductions, larger standard deduction. Both the House-passed bill and the version before the Senate would repeal or reduce many popular tax deductions in exchange for a larger standard deduction. Here’s what you can do now:
- The House bill would eliminate the deduction for nonbusiness state and local income or sales tax, but would allow an up-to-$10,000 deduction for real estate taxes on your home. The pending Senate bill would ban all nonbusiness deductions for state and local income, sales tax, and real estate tax. If you are an employee who expects to owe state and local income taxes when you file your return next year, you may consider asking your employer to increase your tax withholding for those taxes. That way, additional amounts of state and local taxes withheld before the end of the year will be deductible this year. Similarly, you may wish to pay the last installment of estimated state and local taxes for 2017 by Dec. 31 rather than on the 2018 due date, or prepay real estate taxes on your home.
- You may want to consider accelerating charitable contributions to this year. While neither the House-passed bill nor the bill before the Senate would repeal the itemized deduction for charitable contributions, it will be harder to take advantage of its benefits due to their changes. Because most other itemized deductions would be eliminated in exchange for a larger standard deduction (e.g., in both bills, $24,000 for joint filers), charitable contributions after 2017 may not yield a tax benefit for many.
- The House-passed bill, but not the one before the Senate, would eliminate the itemized deduction for medical expenses. If this deduction is cut, and you are able to claim medical expenses as an itemized deduction this year, consider accelerating “discretionary” medical expenses into this year. For example, order and pay for new glasses, arrange to take care of needed dental work, or install a stair lift for a disabled person before the end of the year.
Other year-end strategies. Here are some other “last minute” suggestions:
- The exercise of an incentive stock option (ISO) can result in AMT complications. However, both the Senate and House versions of the bill call for the AMT to be repealed. So if you hold any ISOs, it may be wise to hold off exercising them until next year.
- If you have been considering purchasing a plug-in electric vehicle, buying one before the end of the year could yield you an up-to-$7,500 discount in the form of a tax credit. The House-passed bill, but not the one before the Senate, would eliminate this credit.
- If you’re in the process of selling your principal residence and you close before end of the year, up to $250,000 of your profit ($500,000 for certain joint filers) will be tax-free if you owned and used the property as your main home for at least two of the five years before the sale. However, under the House-passed bill and the bill before the Senate, the $250,000/$500,000 tax free amounts would apply to post-2017 sales only if you own and use the property as your main home for five out of the previous eight years.
- Both the House-passed bill and the Senate version would repeal the deduction for moving expenses after 2017 (except for certain members of the Armed Forces), so if you’re about to move for a job, try to incur your deductible moving expenses before the end of the year.
Please keep in mind that this letter describes only some of the year-end moves that should be considered in light of the tax reform package currently before Congress—which, it bears repeating, may or may not actually become law and can be potentially revised in material ways. If you would like more details about any aspect of how the proposed legislation may affect you, or if you would like to discuss more specific strategies tailored to the needs of you, your family, or your business, please do not hesitate to call our firm to speak with one of our tax attorneys.
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