With the passage of new tax legislation by Congress, the usual gamut of year-end tax considerations has been made more complicated this year. The timing of this legislation leaves US taxpayers with little time to determine what actions need to be taken this year to give them favorable consideration in 2017 and beyond. Vandenack Weaver LLC has assembled the most important changes here for your consideration. We encourage you to discuss these issues with your tax professionals.
- 2018 Real Estate Taxes – The new tax legislation limits the deductibility of state income tax, real estate taxes, or sales tax to $10,000. With this new limit, some clients may find it advantageous to pay all but $10,000 of their 2018 real estate taxes in 2017. If you are paying taxes into an escrow account, you are eligible to take the deduction in the year when the bank pays the property taxes, not when you pay the bank. As such, consult with your bank to determine if you may take advantage of this. Note, for those clients who are subject to the Alternative Minimum Tax (AMT) in 2017, paying early is inapplicable as these taxes are not deductible when computing AMT in 2017.
- Gifts – Gift and generation skipping transfer tax exemptions will double under the new tax legislation. For those making large gifts, consider waiting until the new year in order to avoid 2017 tax consequences. However, remember to make your annual gifts before the end of the year. These limits will increase from $14,000 to $15,000 in 2018, but if you do not make a transfer in a calendar year, you will not get the exemption for that calendar year.
- Payment Timing for Estimated State Income Taxes – Traditionally, state and local income taxes have been deductible provided that such tax payments were based on a reasonable estimate of the taxpayer’s actual liability (and that the state has authorized the tax payment). This was available even if you received a refund after the end of the year for which payments were made. The new tax legislation curtails this practice. For example, an amount paid in 2017 for taxes that are imposed in 2018 or later will be treated as though it was paid at the end of 2018. This is particularly important for individuals who are under audit or who have outstanding liabilities for 2017 and earlier. In 2018, deductions for payments of taxes attributable to prior years will be severely reduced. Consider settling these issues prior to 2018.
- Moving Expenses – Under the new tax legislation expenses for a work-related move will be eliminated (except for those in the military). While it is highly unlikely anyone who hasn’t planned to or already moved will be able to take advantage of this, it is important to take this change into consideration for your future plans.
- Impact to Charitable Gifts – Although the new tax legislation did not make many changes to deductions for charitable gifts, other changes in the legislation will impact how far charitable gifts go in reducing your taxes. Because the tax brackets are shifting downward, many taxpayers will find themselves requiring fewer deductions in 2018. Thus, making a charitable deduction in 2017 could have a greater impact on your taxes than in 2018. There are many factors that can impact the deductibility of your charitable contributions, so it is highly advised that you speak to a tax consultant before making any decisions. It should also be noted that because of the overall decrease in itemized deductions and the increase of the standard deduction, some taxpayers will find it more advantageous to take the standard deduction in the new year. If you are taking the standard deduction, then you will not be able to deduct your charitable contributions. One change that was made to the deductibility of charitable gifts is in the ability to deduct 80 percent of an amount donated to a university in order to acquire the right to purchase tickets to the university’s sporting events. That deduction will no longer be available after December 31. If you expect to make any such donations, you should consider doing so before the end of the year to take advantage of this expiring deduction.
- Miscellaneous Itemized Deductions – If you do visit a tax consultant to discuss these issues, be sure to consider paying for those services in 2017! The new tax legislation eliminates the deductibility of tax preparation fees as well as other miscellaneous itemized deductions. Some of these include appraisal fees for charitable gifts of property, investment advisory advice, and safety deposit box fees. Clients should look at paying any of those expenses that are coming up in 2018 now to get the deduction before it is gone.
- Unreimbursed Employee Expenses – Expenses that are attributable to an employee’s work and that have not been reimbursed are deductible in 2017. However, the new tax legislation will be eliminating this deduction. As with miscellaneous itemized deductions, clients should look to move any of these expenses that they were planning to incur in 2018 to the current year. Such expenses may include tools, uniforms, work-related education, even unpaid mileage and gas if the trip was work related. Business owners are still able to deduct business expenses on Schedule C under the new legislation.
- Mortgages – Current tax law allows for a deduction of the interest paid on up to $100,000 (for married couples) of home equity debt on a personal residence. This interest will no longer be deductible with the new tax legislation. Interest on mortgages for the acquisition of a principal residence will remain deductible, but the debt cap of $1,000,000 (for married couples) will be lowered to $750,000. However, those who have purchased a home before December 15, 2017, will still be able to use the higher cap. These changes may impact your decision in purchasing a home as it effectively increases the cost of the loan. In addition, this is also one of the main reasons why many clients may consider taking the standard deduction in the future as the deduction for mortgage interest can make up a significant portion of your itemized deductions.
- 8% Surtax – While the new tax legislation does not change the present 3.8% surtax on net investment income, some other changes may cause your taxable net investment income to rise in 2018. First, as noted earlier, the deduction for investment-related expenses will no longer be available. In addition, state income taxes that could previously be deducted (to the extent they were connected to net investment income) are now capped at the $10,000 limit. Clients should consider making any of these payments they can in 2017 in order to take advantage of these deductions.
- Roth IRAs – The new tax legislation changes an existing rule regarding Roth IRAs. Presently, if you convert a traditional IRA to a Roth IRA, you may undo the conversion by recharacterizing it within specified time frames. The new legislation removes the ability to recharacterize a Roth IRA. In addition, there is legislative ambiguity as to what Roth IRAs may be impacted by this. If you have converted an IRA in 2017 and are considering recharacterizing the subsequent Roth IRA, it is advisable you complete the recharacterization in 2017 to avoid any ambiguity in the law.
- Capital Gains – Taxes on capital gains do not change significantly with the new tax legislation. However, there are some hidden issues to consider. Because income tax rates and tax brackets are changing significantly, accelerating or deferring your capital gains may create a positive impact (or avoid a negative one). Specifically, one of the major issues to consider is whether your taxable income will increase because of these changes that could bump your capital gains tax rate to a higher amount (from 15% to 20% for taxable income over $479,000). One caveat to this issue is that it is highly dependent on other factors such as where you live. Given the short amount of time left in the year it may not be possible to take advantage of these changes.
- Pass-Through Business Limits – With the reduction of the corporate tax in the new tax bill, a corresponding change is made to the taxation of pass-through businesses (which do not pay the corporate tax) in order to keep them competitive. Those participating in a pass-through business will be able to deduct 20% of their allocable share of business income. There are some limits to this, primarily if you earn more than $157,500 if single or $315,000 if married. In addition, if you are in certain professional jobs such as accountants, doctors, or lawyers, the deduction will not apply unless you make under certain specified limits. Still, small businesses may want to consider reorganizing in order to take advantage of these new tax savings.
- Recently Purchased Business Equipment – One of the new provisions allows for the full and immediate expensing of qualifying capital investments (as opposed to gradual deductions). In addition, the provision will be applicable in the 2017 tax year for purchases made after September 27, 2017. Businesses should speak to their tax professionals to consider if this applies to them or if they should purchase new equipment before the new year to include it on their 2017 return.
- Limits of the Bill – One final point to note is that many of these changes will terminate in 2025 or earlier, at which time the tax code will revert to the old rules. Therefore, consultation with a tax professional is encouraged to ensure that you will be receiving the best tax treatment now and in the future
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