In the last few days we have seen one of the largest tax law reforms in thirty years, make its way through congress and is headed to the President’s desk to sign. The new tax reform will make fundamental changes in the way you, your family and your business calculate your federal income tax bill, and the amount of federal tax you will pay.
Since most of the changes will go into effect next year (2018), there’s still a narrow window of time before year-end to soften or avoid the impact of crackdowns and to best position yourself for the tax breaks that may be heading your way. Here’s a quick rundown of last-minute moves you should think about making as well as some changes that will take place in 2018.
Actions to take before the end of 2017
- Prepay your 2017 state taxes: Starting in 2018, the new tax law will limit the amount of the property and state taxes you can deduct on your itemized deductions to $10,000. Most 2017 4th-Quarter estimated tax payments are not due until January 15th, 2018. Taxpayers should consider paying the 4th-Quarter estimated taxes in December 2017 in order to get the tax benefit of the deduction now. If you income has gone up in 2017, then be sure to increase your state tax payment for the increase rather than waiting until your 2017 taxes are calculated in April of 2018
- Make charitable contributions to your favorite university athletic fund before the end of the year: One popular charitable contribution taxpayers like to make is to their favorite university’s athletic fund in order to receive the rights to purchase athletic tickets to basketball or football games. Starting in 2018, taxpayers will no longer be able take a deduction for charitable contributions made to university athletic departments in order to receive the rights to purchase tickets to athletic events. This deduction is still available for 2017 and therefore, taxpayers should consider making contributions to their favorite university athletic funds prior to the end of the year.
- Accelerate Expenses and Deferred Income: In general, the new tax law reduced tax rates for years 2018 and beyond. By accelerating expenses, taxpayers will be able to reduce income taxed at higher rates. While on the other hand, deferring income will allow income to be taxed at future lower rates.
- Rethink a Roth Conversion: If you make the conversion prior to the end of 2017, you will have the opportunity to change your mind if you decided to later in 2018 (up to October 15th 2018). If you wait to convert in 2018, the new tax law will not allow you to change your mind.
Overall the new tax law reform is over 1,000 pages long however, below is a short summary of some of the major provisions in the law. This is list is not comprehensive and therefore we recommend talking to your CPA about your individual situation and additional questions.
Items Affecting Individuals
- Tax brackets – The law provides for seven individual tax brackets – 10, 12, 22, 24, 32, 35 and 37 percent. The top individual rate of 37 percent will apply for individuals earning $500,000 and above and joint filers earning at least $600,000.
- Standard deduction and personal exemptions – The standard deduction is doubled to $12,000 for individuals and $24,000 for married couples, and the additional deduction for the elderly and the blind is retained. The deduction for personal exemptions is repealed.
- Home mortgage interest deduction – The deduction for home mortgage interest will be limited to interest on $750,000 of acquisition indebtedness incurred on newly purchased principal and second residences after Dec. 15, 2017, and a deduction for interest on any home equity loans will not be allowed, regardless of when the loan was obtained.
- State tax deduction – A deduction of up to $10,000 for state and local property, income or sales taxes is allowed. However, the Act precludes taxpayers from pre-paying 2018 state and local income taxes in 2017 in order to get the deduction before the $10,000 cap is imposed after 2017.
- Alimony – Alimony paid pursuant to divorce after Dec. 31, 2018, will not be deductible (or includible in the income of the recipient). Modifications to existing agreements will be impacted.
- Medical expenses – Medical expenses exceeding 7.5 percent of adjusted gross income (AGI) will be deductible for 2017 and 2018, and the AMT preference for medical expense deductions is eliminated for 2017 and 2018.
- AGI limitations – The 3 percent of AGI limitation on deductions is suspended, and a reduction for miscellaneous deductions that exceed 2 percent of AGI is eliminated (including investment management fees, tax preparation fees and unreimbursed business expenses).
- Charitable contributions – The deduction for charitable contributions is preserved, with an increase in the AGI limitation for cash contributions to public charities and certain private foundations from 50 percent to 60 percent.
- 529 plans – Up to $10,000 of 529 savings plans can be used per student for public, private and religious elementary and secondary schools.
- Individual Retirement Accounts (IRAs) – A conversion of a traditional IRA to a Roth IRA cannot be re-characterized as a contribution to a traditional IRA. This does not prevent conversion of a traditional IRA into a Roth IRA, only the reversal of such a conversion is barred.
Items Affecting Business
- Corporate tax rate – Rates are reduced from a top rate of 35 percent to 21 percent.
- Corporate alternative minimum tax (AMT) – The corporate AMT is repealed.
- Pass-through businesses – Pass-through businesses are allowed a deduction tantamount to excluding 20 percent of the business income of many pass-through entities and sole proprietors. For owners otherwise subject to the top 37 percent individual tax rate, the effective tax rate on qualified income will be reduced to 29.6 percent.
- Pass-through owners whose taxable income exceeds $315,000 for a joint return (or lower amounts for single filers) are subject to restrictions on the deduction in situations where the business did not have a specified level of wage payments or a specified amount of tangible, depreciable assets used in the business. In addition, restrictions on the deduction apply to certain service businesses and other businesses described in the new law.
- Trusts and estates are eligible for the 20 percent deduction.
- A new restriction limits an owner’s ability to deduct active business losses against non-business income.
- Capital expensing – The legislation provides for immediate expensing (i.e., 100 percent bonus depreciation) for certain qualified assets acquired and placed in service after Sept. 27, 2017. The 100 percent bonus depreciation benefit will begin to phase out in 2023. The Act also increased the expensing allowance under section 179 to $1 million, also subject to a phase-out.
- Business interest – The deduction for net business interest of corporations and many pass-through businesses is limited under a formula. Generally speaking, deductions cannot exceed 30 percent of EBITDA (earnings before interest, taxes, depreciation and amortization) for the next four years. After that period, interest deductions may not exceed 30 percent of EBIT (earnings before interest and taxes). Disallowed interest deductions can generally be carried forward indefinitely, but may be subject to certain limitations applicable to partnerships. Certain taxpayers are exempted from these rules, including taxpayers with average gross receipts of $25 million or less for the three years immediately preceding the effective date of this provision, as well as taxpayers involved in certain real estate activities.
- Net operating losses (NOLs) – The Act limits the NOL deduction to 80 percent of taxable income. Carrybacks are generally eliminated, but unused losses can be carried forward indefinitely.
- Domestic manufacturing deduction – The section 199 domestic production deduction is repealed.
- Like-kind exchanges – Like-kind exchanges under section 1031 are limited to real property that is not held primarily for sale. Personal property no longer qualifies for tax-deferred treatment.
The new tax law reform will affect everyone slightly differently. We recommend discussing the changes with your CPA and how the new law applies to your individual situation.