The Tax Cuts and Jobs Act (H.R. 1) has been approved by Congress and is on its way to the White House. The most sweeping change to the U.S. tax code in decades cleared the Senate, 51 to 48 on December 20 followed by the House approval, 224 to 201, later the same day. President Trump has signaled his support for this tax legislation and is expected to sign the bill into law when it reaches the White House.
ECS has described the changes below which will impact individual taxpayers. Each taxpayer’s facts and circumstances are different and there may be actions you can take now to help minimize any projected increase in tax.
Some of the key changes to tax provisions in the tax bill include:
Most taxpayers can expect a reduction to your marginal tax rate. Absent non-tax cash-flow considerations, taxpayers should consider strategies of deferring income and accelerating deductions for 2017. This is generally consistent with conventional tax planning when tax rates remain steady year over year. Taxpayers should remain cautious however; as such strategies can subject taxpayers to the alternative minimum tax (AMT) and the potential 3% haircut on itemized deductions, thereby resulting in a higher overall tax liability. The effect of AMT can eliminate any perceived benefit of tax planning if not considered thoroughly. Furthermore, the type of income should also be considered as deductions offsetting income at the qualified dividends and long-term capital gains rate may not be as valuable as offsetting ordinary income in a subsequent year when analyzed on a combined basis. It is strongly encouraged that taxpayers work with their tax advisers to determine the potential impact of prepaying expenses.
Income deferral opportunities exist by contributing to qualified retirement plans, deferral of stock options, harvesting capital losses, utilizing installment sales or like-kind exchange opportunities, and deferring retirement plan/IRA distributions (other than required distributions). Generally, it is difficult for W-2 wage earners to shift wage income as they may not be in control of the timing of their cash wages. Opportunities may exist for certain earners with respect to the timing of the exercise of options or the timing of certain income as part of a nonqualified deferred compensation plan. Taxpayers should consider making the maximum contribution to their 401(k) retirement plan given the impact of compounding interest and tax-deferred income accumulation. These contributions lower current-year taxable income while the earnings grow tax-deferred. Moreover, if an employer offers an employer matching contribution, employees should review their contributions made to date to maximize their employer matching contributions in advance of year-end.
Possible deduction increases come from using business losses, pre-paying business expenses, applying accelerated depreciation strategies for business use assets, offsetting ordinary income via SEP-IRAs and solo 401(k) plans, etc. Possible deductions are dependent on each taxpayer’s facts and circumstances.
The increased standard deduction may cause many taxpayers to lose the benefit of any itemized deductions in subsequent years. For example, the standard deduction for married filing jointly increases to $24,000. Therefore, only those with allowable mortgage interest, property taxes, and charitable contributions in excess of $24,000 would receive any tax benefit. Consequently, taxpayers should focus on accelerating itemized deductions into 2017 if their itemized deductions are generally above the current standard deduction, but below the 2018 standard deduction. These items include medical expenses, state and local income taxes, real estate taxes, charitable deductions, tax preparation fees, investment fees, etc. For example, a charitable contribution of $15,000 absent other deductions would provide benefit for a married couple to itemize on their 2017 tax return, but the tax benefit from those donations wouldn’t under the proposed higher standard deduction. For those taxpayers who are charitably inclined, contributions to a donor advised fund would allow for a deduction in 2017 while the tax rates are higher. Contributions to donor advised funds can be sent to a qualified organization of your choice after the year, but contributions made to the donor advised fund in the current year give rise to a current year deduction. After considering AMT exclusions, cash-flow considerations, and tax-rate analysis, it may be beneficial to pre-pay some itemized deductions. Please work with your tax adviser to determine how best to maximize deductibility of these expenses.
For taxpayers not subject to AMT, prepaying real estate taxes can provide for a tax benefit on the 2017 returns given the $10,000 limitation in 2018 and beyond. Because the real estate taxes for these counties are assessed and paid in arrears, a tax deduction for prepayment would be available. For residents in the Chicago area, the first installment of 2017 Cook County real estate taxes are due in February 2018. Real estate taxes for Lake and McHenry Counties are due in June 2018. Guidelines for prepayment vary by county. Local county guidelines are as follows: