Dear Clients and Friends,
On December 22, President Trump signed into law H.R. 1, the “Tax Cuts and Jobs Act,” a sweeping tax reform law that will entirely change the tax landscape. The legislation reflects the largest major tax reform in over three decades.
This comprehensive tax overhaul dramatically changes the rules governing the taxation of individual taxpayers for tax years beginning before 2026, providing new income tax rates and brackets, increasing the standard deduction, suspending personal deductions, increasing the child tax credit, limiting the state and local tax deduction, and temporarily reducing the medical expense threshold, among many other changes. The legislation also provides a new deduction for non-corporate taxpayers with qualified business income from pass-throughs.
For businesses, the legislation permanently reduces the corporate tax rate to 21%, repeals the corporate alternative minimum tax, imposes new limits on business interest deductions, and makes a number of changes involving expensing and depreciation. The legislation also makes significant changes to the tax treatment of foreign income and taxpayers, including the exemption from U.S. tax for certain foreign income and the deemed repatriation of off-shore income.
Click here to see an analysis of the Tax Cuts and Jobs Act. We will send you a more comprehensive analysis over the next month, and also be in touch with you on 2018 strategies specific to your individual and/or business tax situation. In the meantime, following are some strategies you should be doing before January 1, 2018:
Disappearing or reduced deductions, larger standard deduction. Beginning next year, the Tax Cuts and Jobs Act suspends or reduces many popular tax deductions in exchange for a larger standard deduction. Here is what you can do about this right now:
- State and Local Income Taxes and Property Taxes: 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 December 31, 2017, rather than on the 2018 due date. Do not prepay in 2017 a state income tax bill that will be imposed next year; Congress says such a prepayment will not be deductible in 2017. Pay any remaining property tax installments no later than December 31, 2017. Note that much of this approach is useful only if you do not anticipate being subject to the Alternative Minimum Tax (AMT) in 2017. As you consider that issue, please keep in mind that accelerating deductions into 2017 might trigger the AMT for you.
- Charitable Contributions: Itemized deduction for charitable contributions will not be reduced. Because 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 will not be able to itemize deductions. If you think you will fall into 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. 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 will not be able to itemize deductions after this year, but will be able to do so this year, 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. 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 will not 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.
Other year-end strategies. Here are some other last-minute moves that can save tax dollars in view of the new tax law:
- 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 AMT complications. So if you hold any ISOs, it may be wise to postpone exercising them until next year. 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 will not be subject to the 2018 AMT, it may be worthwhile, via tax elections or postponed transactions, 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 December 31, 2017, such swaps will be possible only if they involve real estate that is not held primarily for sale. So if you are considering a like-kind swap of other types of property, do so before year end. The new law says the old, far more liberal, like-kind exchange rules will continue apply to exchanges of personal property if you either dispose of the relinquished property or acquire the replacement property on or before December 31, 2017.
- For decades, businesses have been able to deduct 50% of the cost of meals and entertainment directly related to or associated with the active conduct of a business. For example, if you take a client to dinner after a business meeting, you can deduct 50% of the cost if strict substantiation requirements are met. But under the new law, for amounts paid or incurred after December 31, 2017, there is no deduction for such expenses. If you have been thinking of entertaining clients and business associates, do so before year end.
- 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 are in the midst of a job-related move, try to incur your deductible moving expenses before year end. If the move is connected with a new job and you are getting reimbursed by your new employer, press for a reimbursement to be made to you before year end.
- 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 two percent of adjusted gross income. The new law suspends the deduction for employee business expenses paid after 2017. You 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 til now and lowering your salary by an amount that approximates those expenses. In most cases, such reimbursements would not be subject to tax.
- Accelerating or deferring gains/losses: Tax rates are going down, for individuals and businesses. However, there are multiple variables at play here, including state income tax rules, predicting your top income tax bracket for 2018 and the AMT, so it is difficult to determine the best approach without extensive analysis of individual cases.
We will send you a more comprehensive analysis over the next month, and also be in touch with you on 2018 strategies specific to your individual and/or business tax situation.
DUFFY KRUSPODIN, LLP