A Condensed Alert to Generate a Conversation and a Possible Quick-Strike Plan
Congress continues to make significant progress pursuing historic tax reform. While the congressional conference committee works feverishly to resolve differences, we have learned that the members have largely reached agreement and tax reform may occur shortly.
We previously discussed the introduction of the Tax Cuts and Jobs Act (TCJA) in the House of Representatives in early November. Since that writing, the bill has undergone a myriad of changes through its amendment in the Ways and Means Committee, the House, the Senate Finance Committee, the Senate floor and now the conference committee, with the general themes of the bill preserved.
We expect the conference committee to release the final bill by the evening of December 15, 2017, to both chambers of Congress. Barring last minute holdouts in the Senate or House, and we have heard of a few, votes on the final bill are expected in each house next week, with anticipated signature by the president before Christmas.
Shortly after the bill is passed, assuming it is, we will be providing a comprehensive overview of the new legislation, with many year-end planning strategies available in light of the new law. While many of the details of the final bill will be unknown until the full text of the bill is released, we are aware of many of the changes to the tax code being contemplated. As we approach year-end, it is best to remain nimble and flexible in one's approach to maximizing year-end savings, particularly this year.
Given the potentially very short window between enactment and year-end, individuals and businesses should consider what actions may be warranted now, without delaying until tax reform is actually signed into law. While tax planning decisions, including short- and long-term, cannot be absolutely finalized until tax reform is signed into law, we are discussing with our clients various aspects of the proposals and the effect on their personal and business situation. To that end, below please find several quick-strike strategies you may wish to consider in anticipation of late-year passage of tax reform. Please note that these strategies are in contemplation of the current bill passing as is. This Alert notifies you of potential opportunities so that you can begin developing a possible plan for execution at year-end, to be implemented once the final bill is analyzed and passed by Congress.
Lower Tax Rates for Businesses and Individuals
The TCJA will significantly reduce current income tax rates for businesses, pass-through entities and certain individuals. For businesses, the bill will likely reduce the corporate tax rate from 35 percent to 21 percent, and individuals reporting income from certain pass-throughs will likely receive a deduction of about 23 percent of their qualified pass-through business income. For individuals, the top tax bracket will be reduced from 39.6 percent to about 37 percent, with incremental changes to the lower brackets and higher income thresholds for the higher brackets.
Therefore, as 2017 concludes, it appears that the tried and true strategy of accelerating deductions into the current year (2017), and deferring income into the following year (2018), will be particularly advantageous for many taxpayers.
Income Deferral Strategies
- Defer receipt of any 2017 bonuses to 2018
- Increase investments in tax-deferred accounts, such as 401(k)s
- Postpone any possible conversions to Roth IRAs until 2018
- For cash based businesses, defer billing until 2018
- For accrual based businesses, consider deferring completion of work until 2018
Elimination or Reduction of Certain Common Deductions and Credits
The TCJA is expected to eliminate or reduce many common deductions, as Congress looks to increase the number of taxpayers claiming the standard deduction while correspondingly reducing the number of taxpayers able to itemize their deductions. The bill will likely limit the amount of state and local tax deductions to $10,000 per year, perhaps inclusive of property, income and sales taxes. In addition, miscellaneous itemized deductions (including tax preparation fees, unreimbursed employee expenses and investment fees, among others) will likely be repealed. The final bill is expected to retain the individual Alternative Minimum Tax (AMT), though with dramatically increased exemptions, aimed at affecting only taxpayers with incomes over $500,000 ($1 million for joint filers).
If you were not subject to the AMT in 2016 (line 45 of Form 1040), and expect substantially similar income and deductions in 2017 so that you are not subject to this secret tax for 2017, you may wish to consider accelerating your 2018 deductions into 2017 by doing the following before December 31:
- Prepay any fourth quarter 2017 estimated state and local income taxes due January 15, 2018
- Prepay any projected 2017 balances for state and local income taxes due in April 2018
- Pay any property tax bills which will be due in early 2018
- Pay any home equity interest due in January
- Pay tax preparation fees if you expect miscellaneous deductions to exceed 2 percent of your Adjusted Gross Income (AGI)
- Pay any investment expenses incurred (again, only if you expect miscellaneous deductions to exceed 2 percent of your AGI)
If you do expect to be subject to the AMT in 2017, you may consider accelerating income into 2017 to take advantage of the 28 percent rate in the AMT rather than the higher rates up to 39.6 percent. Additionally, if you do expect to be in the AMT in 2017, there are still certain deductions that will provide a benefit by accelerating into 2017. In fact, regardless of whether you expect to be subject to the AMT or not in 2017, most taxpayers would benefit from the following:
- Prepay any above-the-AGI-line business entertainment expenses for 2018
- Prepay any mortgage payments on primary or secondary residences due in January
- Accelerate charitable contributions before year end (but not above 50 percent of AGI), including appreciated securities
- Pay as many unreimbursed moving expenses before year end as possible
- Buy an electric car before year-end, as the credit is expected to expire in 2017
Selection of Lots in the Sale of Securities
Beginning in 2018, the TCJA will likely require businesses and individuals to determine the cost of any security sold on a first-in, first-out (FIFO) basis, and would no longer be able to identify specific lots being sold. Gain and loss harvesting this year may make good sense to achieve the desired result (e.g., greater gains or greater losses) as investors may lose the ability to tax manage security positions after this year. It may even make sense to harvest losses in 2017 under the presently allowable specific identification method, and carryforward the loss (which may otherwise be trapped ahead of FIFO gains) into 2018 to offset projected future FIFO gains.
Accelerate Certain Transactions
If you intend to sell a principal residence, you may wish to consider entering into a binding contract or closing on the sale on or before December 31, 2017, if you anticipate relying on the existing capital gain exclusion. Under present law, you may exclude capital gains of up to $500,000 (or $250,000 for single filers) if you owned and used the home for two out of five years. Proposed changes would change the test to five out of eight years, could phase-out the exclusion for higher income taxpayers (AGI exceeding $500,000 joint/$250,000 individual), and may only permit the use of this exclusion every five years (rather than every two as under present law).
If you are in the process of entering into divorce and separation agreements, you may want to consider accelerating this process before year-end, depending if you are the alimony payor or recipient. Alimony paid under agreements entered after 2017 may not be deductible and alimony received not taxable.
Expensing of Business Property
Under existing law, businesses can expense up to $510,000 of qualified business property purchased during the year. This deduction is completely phased out if qualified property purchased exceeds $2.54 million. Additionally, bonus depreciation can be taken on 50 percent of qualified new property placed in service during the year, regardless of the amount of property purchased. In 2018, under the TCJA, thresholds are expected to dramatically increase for expensing under section 179, and 100 percent bonus depreciation will likely be available, potentially even for the purchase of used assets.
Therefore, if you are approaching the limits on section 179 expensing for 2017, or are considering purchasing used property, you should wait until after year-end to make any large purchases of qualified business property, in order to benefit from the larger expensing limitations that are expected with tax reform.
As a result of the short window between new law passage and year-end, we prepared and designed this condensed Alert to generate a conversation. These are just a few of the planning opportunities to be discussed in our anticipated 2017 Year-End Tax Planning Alert, which is expected to be available shortly after passage of the bill. We hope that you have found the above useful in pre-planning your actions for the next few weeks. Please keep in mind that the strategies discussed herein may not be applicable in all circumstances.
For Further Information
If you would like more information about this topic or your own unique situation, please contact Michael A. Gillen of the Tax Accounting Group or the practitioner with whom you are in regular contact. For information about other pertinent tax topics, please visit our publications page.
Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.