By: Joseph M. Tamburello
Congress appears poised to enact a major tax reform that could potentially make fundamental changes in the way you and your family calculate your federal income tax bill, and the amount of federal tax you will pay. This letter is designed to help you evaluate the changes that Congress is working on right now, and how those changes may impact your personal tax situation for 2017 and future years. Keep in mind, however, that while most experts expect a major tax law to be enacted this year, it's by no means a done deal. So, keep a close eye on the news and contact us for any assistance before implementing any strategy to help minimize any adverse tax consequences.
Lower tax rates are coming. Both tax bills that passed the House of Representatives and the Senate would reduce tax rates for many taxpayers, effective for the 2018 tax year. Additionally, businesses may see their tax bills cut, although the final form of the relief isn't clear right now.
Your plan of action
The general plan of action to take advantage of lower tax rates next year would be to defer income into next year. Some possibilities follow:
- If you are an employee who believes a bonus is coming your way before year end, consider asking your employer to delay payment of the bonus until next year.
- If you are thinking of converting a regular IRA to a Roth IRA, postpone your move until next year. That way you'll defer income from the conversion until next year and hopefully have it taxed at lower rates.
- If you run a business that renders services and operates on the cash basis, the income you earn isn't taxed until your clients or patients pay. So, if you hold off on billings until next year, you will succeed in deferring income until next year.
- If your business is on the accrual basis, deferral of income till next year is difficult, but it's not impossible. For example, you might, with due regard to business considerations, be able to postpone completion of a 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 that the rules in this area are complex and may require a tax professional's input.
- 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, consider postponing action until January to defer any debt cancellation income into 2018.
Disappearing deductions, larger standard deduction
Beginning next year, both tax reform bills would repeal or reduce many popular tax deductions in exchange for a larger standard deduction. Here's what you can do about this right now:
- Both tax reform bills 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. If you are an employee who expects to owe state and local income taxes when you file your return next year, consider asking your employer to increase withholding on those taxes. That way, additional amounts of state and local taxes withheld before the end of the year will be deductible in 2017. Similarly, pay the last installment of estimated state and local taxes for 2017 by December 31 rather than on the 2018 due date, or prepay real estate taxes on your home.
- Neither tax reform bill would repeal the itemized deduction for charitable contributions. However, because most other itemized deductions would be eliminated in exchange for a larger standard deduction (e.g., $24,000 for joint filers in the Senate bill, while $24,400 in the House bill), charitable contributions after 2017 may not yield a tax benefit for many. If you think you will fall in this category, consider accelerating some charitable giving into 2017.
- Though the Senate bill retains the itemized deduction for medical expenses, the House bill would eliminate it. If this deduction is indeed chopped in the final tax bill, 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" moves that could wind up saving tax dollars in the event tax reform is passed:
- The exercise of an incentive stock option (ISO) can result in AMT complications. The House version of the tax reform bill calls for the AMT to be repealed next year, but the Senate version does not. Nevertheless, the Senate version increases the exemption amount. So, whether the House version of the bill prevails with regard to AMT or not, and you hold any incentive stock options, it may be wise to hold off exercising them until next year.
- If you are in the market for a new car, and you happen to have your eyes on a plug-in electric vehicle, buying one before year-end could yield you an up-to-$7,500 discount in the form of a tax credit. The House bill, but not the Senate bill, would eliminate this credit after 2017.
- If you're in the process of selling your principal residence and you wrap up the sale before year end, 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 both the House bill and the Senate bill, 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.
- Under current rules, alimony payments generally are an above-the line deduction for the payor and included in the income of the payee. Under the House bill, but not the Senate bill, alimony payments would not be deductible by the payor or includible in the income of the payee, generally effective for any divorce decree or separation agreement executed after 2017. So, 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 if the House bill carries the day. 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.
- Both tax reform bills would repeal the deduction for moving expenses after 2017 (except for certain members of the Armed Forces), so if you're about to embark on a job-related move, try to incur your deductible moving expenses before year-end.
Please keep in mind that I've described only some of the year-end moves that should be considered in light of the tax reform package currently before Congress-which, it bears emphasizing, may or may not actually become law. If you would like more details about any aspect of how the proposed legislation may affect you, please do not hesitate to call.