United States: 2017 Year-End Individual Income Tax Planning In Consideration Of The Tax Cuts And Jobs Act

On Tuesday, December 19, 2017, the House of Representatives voted to pass the Tax Cuts and Jobs Act (TCJA). The Senate was expected to vote on the bill shortly thereafter. The TCJA combines the House and Senate versions of the proposed tax reform. If the bill is enacted, it will be the most comprehensive tax reform in more than 30 years.

With the developments continuing, this article is intended to identify year-end individual planning suggestions that may need to be implemented by December 31, 2017, based on the information known at the time this article was published.

In light of the likelihood that the TCJA will be enacted with its extensive impact on 2018 individual income taxes, we are recommending that clients focus on year-end planning that defers income to next year and accelerates deductions into this year. With the TCJA, the tax rates are expected to decrease next year along with certain deductions being eliminated. Therefore, it could help to prepay deductions by December 31, 2017, to obtain the deduction this year. However, the benefit of these additional deductions may be limited, if you are subject to Alternative Minimum Tax (AMT) in 2017. We recommend talking with your tax advisor before prepaying any deductions.

We have highlighted some overarching year-end tax planning topics for individuals that may be considered in order to reduce the 2017 tax liability.

Maximize Itemized Deductions in 2017 Eliminated Under the Final Version of TCJA

With the elimination or decreased benefit of many itemized deductions in the proposed TCJA, some basic planning steps can be made to maximize your itemized deductions in 2017:

  • Consider prepaying 2018 real estate taxes. TCJA limits the real estate and state income tax deductions to $10,000 ($5,000 for married filing separate filers). Contact the county tax assessor's office to find out how to prepay the 2018 real estate taxes.
  • Consider paying your 2017 state and local taxes by year-end that would be deductible, such as 2017 fourth quarter state estimated tax payments. Anything paid after December 31, 2017 would be subject to the $10,000 ($5,000 for married filing separate filers) maximum deduction allowed in 2018 under the TCJA for the combined real estate and income tax deductions.
  • Accelerate the payment of any miscellaneous itemized deductions into 2017, such as unreimbursed employee expenses, tax preparation fees and investment advisory fees. Under TCJA, these expenses would not be deductible in 2018. Keep in mind that for these expenses to be deductible in 2017, they need to exceed 2% of your Adjusted Gross Income and not be subject to AMT in 2017.

As mentioned above, please talk with your tax advisor to determine if prepaying these deductions will be beneficial in your specific tax situation. If you are subject to AMT in 2017, then some of these deductions could have little to no benefit by prepaying them.

Maximize Charitable Deductions in 2017

With the expectation of decreasing income tax rates in 2018 based on the reform proposal, charitable planning can be an effective planning tool used to offset higher current year tax rates. To maximize charitable deductions in 2017, consider the following planning tools:

  • Accelerate planned charitable contributions into 2017, if you will likely claim the standard deduction next year.
  • Consider using a Donor Advised Fund or Private Foundation to front-load charitable contributions in 2017. These structures maintain the flexibility of choice for future gifting. In funding these options, consider donating appreciated publicly-traded securities (held over one year). You receive a charitable deduction equal to the fair value of the stock donated, but you do not pay tax on the appreciation of the securities.
  • Consider gifting cash or gain property to a Charitable Remainder Trust to maximize current year gifts. This offers the opportunity to create a current or future stream of income to provide for retirement.
  • If you have not currently received your 2017 IRA Required Minimum Distribution (RMD) and the amount is not currently needed to provide for lifestyle expenses, consider making a Qualified Charitable Distribution of the RMD amount to a charity of your choice. The current maximum allowable deduction for RMD gifts is $100,000 and is expected to be retained in the 2018 tax law.

If you are considering making significant current year charitable donations, you should discuss any current year deductibility limitations with your advisor based on your specific tax situation.

Other Traditional Tax Planning Reminders

We have included some traditional individual tax planning items below that continue to make sense with the current year:

  • Maximize pre-tax contributions to tax-deferred accounts, including 401(k)s, Traditional IRAs and Defined Benefit Plans, such as Cash Balance Plans.
  • If you have a high deductible health insurance plan, consider fully funding pre-tax contributions to a Health Savings Account for 2017 ($3,400 for individual and $6,750 for families; catch-up contributions of an additional $1,000, if you are age 55 or older).
  • Utilize traditional tax-loss harvesting strategies for taxable investment accounts, while maintaining a proper focus on the investment strategy to meet your investment planning goals. Solely utilizing this tax strategy without focusing on the underlying investment mandate is something to be avoided. You should consult with your advisory team before making a decision on harvesting losses to mitigate taxes.
  • Accelerate home mortgage interest payments for amounts accrued by December 31, 2017. Interest, particularly home mortgages, usually is payable in the month after it is incurred. You normally cannot deduct interest paid before it is accrued (prepaid interest).
  • Make continued use of the gift tax rules permitting direct payments to qualified education institutions for tuition payments as a way to offset current year income. There is no adjusted gross income limit on this strategy and the IRS may allow the prepayment of tuition to qualify in the current year, in order to maximize the current income tax deduction. A similar rule applies in gifting to 529 plans, but limits these gifts to the annual exclusion amount ($14,000) and you may use five years of gift tax exclusions in the current year without dipping into your available gift tax exemption.
  • Finally, continue to maximize the yearly gift tax exemption ($14,000 in 2017 and $15,000 in 2018) along with gift-splitting with your spouse if applicable ($28,000 and $30,000).

With the potential extensive tax law changes, you should consult with your advisory team before year-end to determine what planning items makes sense with your specific tax situation.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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