The end of the year is quickly approaching. To help you plan for 2018, we are offering several tax-planning tips for your consideration. Recent discussions about next year’s tax law changes may necessitate a closer inspection of your income and deductions. We have included a summary of these changes followed by a list of ways in which you can decrease your tax liability if these reforms are enacted. We strongly encourage you to review our suggested tips for holistic year-end planning so that you may minimize taxes for 2017 and maximize tax savings in years ahead.
Currently Proposed Tax Reforms
The House GOP has recently passed its plan for tax reform while the Senate is currently developing their own plan. Below are a few of the most significant items from the proposed plans:
- Consolidation of seven current individual tax brackets into four ranging from 10% to 39.6% under both the House and Senate plans
- Elimination of the Alternative Minimum Tax (AMT) for individuals and corporations under both the House and Senate plans
- Increase of the standard deduction to $12,000 for individuals and $24,000 for married couples under both the House and Senate plans
- Possible limitation of the mortgage interest deduction to $500,000 of principal for loans entered into after 11/2/2017 based on the House plan. The Senate proposes no changes to the current $1 million mortgage principal limitation. Both the House and Senate plans disallow deductions for home equity loans.
- Possible limitation of property tax deduction to $10,000 under the House plan and disallowance of the property tax deduction under the Senate plan
- Elimination of most deductions, including the state tax deduction, with the exception of the mortgage interest and charitable deductions
- Increase in limitation for charitable deduction from 50% of income to 60% of income under both the House and Senate plans
- Possible elimination of the estate tax and increase in the lifetime exemption under the House plan or just an increase in lifetime exemption under the Senate plan. Both the House and Senate plans propose the continuation of the limit on lifetime gifting
- Reduction of corporate tax rate to 20% from 35% and, in certain instances, some new tax benefits to certain pass-through income under both the House and Senate plans.
- Potential repeal of the medicare investment surcharge tax based on the Senate plan.
- Potential repeal of the plug-in electric motor vehicle credit for vehicles purchased after 2017.
Loss Harvesting
Consider harvesting unrealized capital losses to offset any net realized capital gains. If you own securities that have become worthless or have made loans that have become uncollectible, ensure that the losses are deductible in the current year by obtaining substantive documentation to support the deduction. We are happy to assist in reviewing possible losses to determine if they are eligible for Section 1244 treatment as ordinary losses.
Accelerating Income
Due to the proposed tax law changes, some taxpayers may be subject to a higher Federal effective tax rate next year. In some cases, it might be worthwhile to consider accelerating income so that income can be recognized in 2017 at a lower tax cost due to lower tax rates or the availability of more deductions to offset this income. We would be happy to review this strategy to determine if there might be benefits to accelerating your income into 2017.
Pre-Pay State Income Tax and/or Property Taxes
In specific scenarios, accelerating your estimated state income tax payments or property tax payments can be highly advantageous. By pre-paying in December 2017 as opposed to 2018, you will be allowed a federal deduction that may offset your current year income. Although this strategy may not be beneficial if you are subject to the alternative minimum tax in 2017, you may receive a benefit related to the net investment income tax for any state income tax payments that you make. The potential tax reform will likely reduce or eliminate the benefit of the state tax deduction and property tax deduction in the future. We consider the benefits of pre-paying state taxes and property taxes with all clients and can advise the best course of action.
Charitable Contributions
Charitable contributions provide current tax savings, generally offsetting your highest taxed income first. Charitable gifts can be made in cash, stock, or other assets. You may want to consider different charitable recipients such as donor advised funds, community foundations, or public charities. Long term, highly appreciated assets provide the most tax savings due to the double benefit of the tax deduction and avoidance of capital gains on appreciation.
If you administer a private foundation, please ensure that you satisfy the grant requirements prior to year end. In general, about 5% of the value of the assets must be granted to qualified organizations every year.
The current tax proposal continues to allow a deduction for charitable gifts. As you review your year end gifting, be sure to determine whether you might get a better tax benefit for making gifts in 2017 versus 2018, keeping in mind impending changes to tax rates. We can advise you on optimizing the amount of charitable giving this year as the tax rules related to charitable giving can be complex.
Gifting
For 2017, the gift tax exclusion remains at $14,000 while the lifetime exemption has increased to $5,490,000. For 2018, under current law, the gift exclusion increases to $15,000 while the lifetime exemption is expected to increase to $5,600,000. Currently, according to the both the House and Senate tax proposals, the lifetime exemption could possibly increase to $10,000,000, which will be indexed for inflation.
Contributions made to 529 plans can be “front-loaded” by making lump-sum payments equivalent to five years’ worth of exclusion ($70,000 for individuals and $140,000 for married couples).
The proposed regulations under Section 2704, which would have severely limited the use of valuation discounts for any type of transfer of interest in certain family limited partnerships or other family business transfers, were withdrawn by the IRS on October 2, 2017. Thus, at present, valuation discounts still appear to be an effective way to gift interests in family entities.
In anticipation of the possible repeal of the estate tax or increase in the lifetime exemption under the proposed tax law, we advise against making taxable gifts in 2017. Annual exclusion gifts and gifts that are below your lifetime exemption should be evaluated with the potential changes in mind prior to executing. We would be happy to assist with more comprehensive estate and tax planning to effectively utilize your lifetime exemption.
Qualified Small Business Stock (QSBS)
Gain on the sale of Qualified Small Business Stock that is held for more than five years may be eligible for a federal gain exclusion ranging from 50% to 100% depending on your date of purchase.
We will happily assist you in reviewing your stock holdings to determine if any are eligible for QSBS treatment.
Required Minimum Distribution (RMD)
Individuals older than 70 ½ generally must take the RMD before the end of the year.
Those individuals who turn 70 ½ in 2017 have until April 1st, 2018 to withdraw their first Required Minimum Distribution (RMD). For these individuals, we recommend an analysis to determine the best year to take the distribution. Taking the distribution in the current calendar year could allow you to remain in a lower tax bracket next year by avoiding having to take and recognize as income two distributions in 2018. Taking the distribution in 2018 might offer benefits in terms of lower tax rates based on the current tax proposal.
Please note that there are currently no Required Minimum Distributions for Roth IRA accounts.
IRA Charitable Contributions
If you would like to make charitable contributions using IRA funds, here are some requirements that will ensure that your donation will qualify for this treatment.
- The IRA owner must be age 70 ½ or older
- The donor must directly transfer the money tax-free to an eligible charitable organization
- The maximum contribution is limited to $100,000
- SIMPLE IRAs and SEP Plans are not eligible
Any distributions made to charity may qualify as part or all of the taxpayer’s required minimum distribution for the year. This option can provide tax savings opportunities for taxpayers who are subject to charitable limitations or deduction phase-outs.
Stock Options
If you own options on high-dividend-paying stocks, options with fast approaching expiration dates, or options with exercise prices well below today’s market value, it may be time to consider exercising. When to exercise options is often a matter of personal preference based on your own beliefs in the future potential of the stock. However, there are major tax considerations to think about given the current proposed tax reform. We recommend consulting with us before year end to review your long-term financial goals and current tax position to determine the best strategy for your stock options.
Solar Tax Credit
The current solar tax credit rate for 2017 is 30% of acquisition and installation costs, beginning at the commencement of solar construction. Under the proposed tax law, the solar tax credit would be extended for all qualified property placed in service prior to 2022 with reduced rates starting in the year 2020.
Depreciation
Businesses can take advantage of depreciation deductions that significantly reduce taxable income. Two methods of achieving this, as available for 2017, are described below. Under the current proposed tax law, businesses would be allowed to immediately expense the cost of new investments in depreciable assets immediately.
- Section 179 allows businesses to deduct the “full price” of qualifying equipment and/or software purchased in 2017 up to $500,000. Equipment/Software must be purchased and placed in service before December 31, 2017 and all equipment purchases, finance, and/or leases must not exceed $2,000,000. If you intend to purchase more than $2,000,000 of fixed assets, you may want to defer the purchase of some assets until 2018, when these purchases might be fully deductible as opposed to having to depreciate the asset over a number of years.
- Bonus Depreciation is offered in 2017 at 50% of the cost of new capital equipment. Unlike Section 179, there is no spending cap. In the event that costs generate a loss, losses can be carried forward.
Planning for the Future
We understand that there could be many tax law changes on the horizon that may affect you. We are ready to discuss any questions that you might have about minimizing your taxes and maximizing any benefits you receive from deductions or credits. Please do not hesitate to contact us for more specific advice regarding your individual tax planning needs.