26 Dec Tax Planning Bullet Points
We’ve received a high volume of tax preparation calls, and we’ve been reaching out to clients regarding actions to take in light of the recent passage of tax reform Below is a bullet-point list of strategies that could be a good fit for you. Of course, we’d like to go over your individual situation before you take any action. These are tax planning actions without much context for the WHY behind the suggestion. Again, contact us to see if this is appropriate for your situation.
- INDIVIDUAL TAX RATES AND BRACKETS:With the lower top tax rate and lower rates overall for most taxpayers, taxpayers may consider deferring income to the new year, or accelerating expenses into 2017.
- CORPORATE TAX RATES AND BRACKETS: With a 21 percent rate for corporations, owners of S corporations may want to model their taxes as a C corporation to determine whether a conversion would be advisable. Provisions to lessen the burden of a conversion are also part of the Agreement.
- NEW DEDUCTION FOR PASS-THROUGH BUSINESS INCOME:The new 20% special deduction for qualified business income of a passthrough (particularly passthroughs that are not service businesses) is a structural change in historic tax law and a major savings/incentive for such businesses. The full deduction is only available to taxpayers whose taxable income is $315,000 or less if married and filing a joint return or $157,500 for other taxpayers. Also, the 20% deduction does not apply to (i) reasonable compensation paid for the taxpayer’s services (S-corp officer/owner), (ii) guaranteed payments to a partner, and (iii) to the extent provided in regulations, payments to a partner for services to the passthrough for services rendered to the trade or business in a capacity other than that of a partner. Taxpayers should examine their current entity choice, and their mode for obtaining reasonable compensation.
- STATE AND LOCAL TAX DEDUCTIONS: Although prepaying 2018 state and local income taxes cannot be taken as a deduction, prepaying fourth quarter 2017 state and local income taxes may still be advisable. Property taxes have to be assessed before 12/31 to be deducted. With the cap on the state and local income tax deduction, some mobile taxpayers may re-evaluate their residency and decide to move to a state with a lower or no income tax. Although the property tax rate of the desired locale should be considered as well.
- HOME EQUITY LOAN INTEREST: Prepaying home equity loan interest if possible may be advisable as that deduction will no longer be available next year. In some cases, paying off home equity debt and using the interest tracing rules to establish investment debt might be a more tax effective way to borrow.
- CHARITABLE CONTRIBUTIONS: In general, many taxpayers will accelerate charitable contributions to 2017 since their marginal rates will be lower in 2018. However, taxpayers who may be impacted by the 50 percent limit could defer some charitable contributions to the following year when the limit will be increased (and when the Pease limitation would also be repealed). Taxpayers who have college athletic event seating rights may want to prepay for those rights before year-end.
- MISCELLANEOUS ITEMIZED DEDUCTIONS: Taxpayers who have significant miscellaneous deductions may consider prepaying these expenses as they disappear after 2017.
- EDUCATION: With more options available for using 529 plans (elementary or secondary school expenses are now allowed), taxpayers could consider contributing additional funds to existing accounts or setting up new 529 plans. Although contributions are not eligible for a federal income tax deduction, many states offer state income tax deductions.
- RECHARACTERIZATION OF ROTH IRA CONVERSION: With the lower tax rates for 2018, if the Roth IRA has not appreciated significantly in value, taxpayers could consider re-characterizing a conversion made earlier in the year and reconverting to Roth status in a future year under the lower rate. Such recharacterization must be done before year-end.
- MOVING EXPENSES: Taxpayers may want to incur deductible moving expenses or push for reimbursement of such moving expenses before the end of the year.
- ALIMONY: For taxpayers in the middle of a separation or divorce, a taxpayer who would need to pay alimony may want to finalize the agreement before the end of 2018.
- LIKE-KIND EXCHANGES: The tax reform package limits the applicability of the gain deferral rules to like-kind exchanges of only real property, effective for exchanges completed after December 31, 2017. Taxpayers who are considering exchanging assets other than real property may consider using a qualified intermediary to dispose of the property being relinquished or acquire the replacement property before the end of the year in order to take advantage of the transitional rule.
- ESTATE AND GIFT TAX: With the increased exemption amounts, taxpayers should consider additional wealth transfers to family members and dynasty trusts in 2018. However, the scheduled sunset raises possible ‘clawback’ concerns that must be taken into account. Taxpayers should examine their current estate planning documents and determine what changes might be warranted with this significant increase in the exemption amounts.
- EMPLOYER CREDIT FOR PAID FAMILY AND MEDICAL LEAVE: The Agreement creates a NEW employer credit for wages paid to qualifying employees on family and medical leave if the rate of payment is at least 50% of the wages normally paid to the employee. The credit would be capped at 12 weeks per employee. Employers should evaluate whether they have the systems in place to track and claim this new credit beginning in 2018.
- HEALTH INSURANCE MANDATE: The penalty for not obtaining health insurance is still in effect for 2018. The penalty is reduced to $0 starting in 2019.
We hope this list has generated some ideas of possible actions you could take soon. For more tax planning information and tax preparation services, call Smith, Kunz & Associates’ tax advisors at (208) 356-8500.