Take Action Now in Preparation for Proposed Tax Reforms

Take Action Now in Preparation for Proposed Tax Reforms

 In Real Estate & Property Strategies, Tax Strategies

Update: Now that the 2017 Tax Cuts and Jobs Act has become law, we’ve expanded upon the of Estate and Gift Tax laws for 2018 here.

Congress is poised to enact a major tax law overhaul that could make fundamental changes to the way you calculate your federal income tax bill and the amount of federal tax you will pay. While Congress shapes the new law in conference committee, do you wonder what you could do now to realize tax benefits and lessen tax consequences?

Specifically, what actions could you take now, in anticipation of these proposed changes?

How to defer income to lower tax

You could defer income to next year.

The reformed tax code offers lower tax rates, so deferring income to next year may be a good strategy in many cases. 

See how to defer income here.

 

You could shift next year’s deductions to this year.

Beginning next year, both the House-passed tax reform bill and the version before the Senate would repeal or reduce many popular tax deductions in exchange for a larger standard deduction. Many deductions itemized in the past, will not have the same impact going forward. So consider shifting some of your deductions to 2017.

See how to shift deductions here.

 

You could take action now, if the following circumstances apply to you:

There are many intricacies to the proposed law that may affect you depending on your specific circumstances:

 

If you are a high net worth family, there are major proposed changes in the pending law for estate and gift tax.

See tax implications here.


Please keep in mind that we’ve described only some of the year-end moves that should be considered in light of the tax reform package currently before Congress—which, at this point, may or may not actually become law. If signed by the president, future revisions or corrections may also be adopted.

 

How to defer income to next year:

    • If you are an employee who believes a bonus is coming 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, other things being equal, 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—or until so late in the year that no payment can be received this year—you will succeed in deferring income until next year.
    • If your business is on the accrual basis, deferral of income until next year is difficult, but 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.
    • Some folks may want to show higher income in 2017 for various reasons, regardless of potential savings and those persons may prefer to receive the income in 2017 if that is the case.

     

    How to shift next year’s deductions to this year:

      • The House-passed tax reform bill would eliminate the deduction for non-business state and local income or sales tax, but would allow an up-to-$10,000 deduction for real estate taxes on your home. The bill before the Senate would ban all non-business deductions for state and local income, and sales tax, but in a late change would allow a deduction for real estate tax up to $10,000 as well. 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 Dec. 31, rather than on the 2018 due date.
      • Prepay real estate taxes for the current fiscal year on your homes if next year they would exceed $10,000.
      • Neither of the passed bills would repeal the itemized deduction for charitable contributions. But 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. If you think you will fall in this category, consider accelerating some charitable giving into 2017.
      • The House-passed bill, but not the one before the Senate, would eliminate the itemized deduction for medical expenses. If this deduction is indeed cut 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.

    Tax Actions for Specific Situations

    Actions for specific circumstances

    Holder of Incentive Stock Options (ISO)

    The exercise of an incentive stock option (ISO) can result in AMT complications. But both the Senate and House versions of the tax reform bill call for the AMT to be repealed next year. So if you hold any ISOs, it may be wise to hold off exercising them until next year.

     

    Seller of your primary residence before year end

    If you are 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 passed bills, 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.

     

    Buyer of an electric vehicle

    If you’ve got your eye on an electric vehicle, buying one before year-end could give you a discount up-to-$7,500 in the form of a tax credit. The House-passed bill, but not the one before the Senate, would eliminate this credit after 2017.

     

    Presently in divorce or separation proceedings

    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-passed tax bill, but not the version before the Senate, 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 the House-passed bill prevails, and you’re in the middle of a divorce or separation agreement on the paying end, try to wrap things up before year end. On the other hand, if you are on the receiving end, it would be worth your while to wrap things up next year.

     

    Presently planning a job related move


    Both the House-passed bill and the version before the Senate 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.

    Tax Implications for Estate and Gift Taxes

    Tax implications for Estate and Gift Tax

    • The House bill doubles the basic exclusion amount for gift and estate taxes from $5.5 million to $11 million per person, indexed for inflation, as of Jan. 1, 2018 (and a couple could shield $22 million), and it repeals the estate tax and the generation skipping tax in six years, as of 2024, while maintaining a full stepped-up tax basis for inherited property (meaning that zero capital gains tax is paid if the appreciated asset is sold immediately after death).
    • The Senate bill preserves the estate tax, but doubles the exemption levels to $11 million for individuals, and $22 million for married couples in 2018. Thus, 2018 is virtually guaranteed to be a banner year for estates up to $22 million. State estate taxes are unaffected.
    • The bills keep the gift tax intact, with a $11 million basic exclusion amount, but by 2023 one bill introduces a top rate of 35%, down from 40%. The annual gift tax exclusion amount remains ($14,000 for 2017; $15,000 for 2018).

     

    We know this is a lot of information to absorb. And this is just a starting point. If you feel like you need more details or would like clarification on any of the above processes, you can call us at Borchers Trust Law Group at 508-803-1900 or contact us online here.

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