As a presidential candidate, Donald Trump promised a dramatic overhaul of the federal tax code. As President, Trump continues to seek major tax changes. Some observers foresee the greatest tax code revision in more than 30 years. However, as of this writing, there is great uncertainty as to when a new tax law might be passed, what it will contain, what the effective dates could be.
Such uncertainty has taxpayers concerned. What should they do in the final weeks and months of 2017, for the best tax results?
Although the final language of any new tax law can’t be known now, some generalities appear probable. Income tax rates may drop for many individuals and businesses, yet some individuals could possibly see increases. The standard deduction is likely to increase dramatically while most itemized deductions will be eliminated. Also the alternative minimum tax (AMT) and the federal estate and gift tax and generation skipping transfer tax could be eliminated.
With this outlook, conventional tax planning might be more valuable than ever. In essence, accelerate existing tax deductions and defer income, where possible.
In case a new tax law is passed, as proposed, it will pay to take tax deductions in high 2017 tax brackets while moving income into a lower-taxed 2018 tax brackets. Even if this legislative push fails for now, and tax rates remain the same, businesses, individuals, and families all stand to gain by reducing this year’s tax bill while delaying income into 2018.
Below is a list of some of the items to consider in 2017 year-end tax planning:
Accelerate deductions into 2017, if possible, and delay income if there is some control over timing.
Itemized deductions to accelerate could include medical and dental expenses, as well as state and local tax payments. The same is true for miscellaneous itemized deductions if they will exceed 2% of AGI.
- Accelerate charitable contribution deductions into 2017, to obtain a tax benefit at a potentially higher rate. For charitable contributions of $250 or more, please remember to collect the required documentation for the donations.
- Delaying tactics could include taking long-term capital gains in January 2018 instead of December 2017.
- Workers with employee retirement plans should maximize contributions, if possible, in 2017. Be sure to contribute at least enough to get any employer match in full.
- IRA owners over age 70½ should explore making their charitable donations directly from their IRAs, as qualified charitable distributions, up to $100,000 per donor in 2017.
- Donors might give appreciated securities instead of cash. For multiple gifts of appreciated securities, take advantage of the convenience of a donor-advised fund by making a large year-end contribution.
- Harvest capital losses to offset capital gains. Consider taking capital gains to use up loss carryovers.
- Spend any “use it or lose it” dollars in a flexible spending account.
- Time education expenses for the best tax result between paying in December 2017 or January 2018.
- Make efforts to collect debts, in order to claim a bad debt deduction in 2017, if that becomes necessary. In such context, worthlessness must be established.
- Dispose of disappointing small business stock if that would provide a section 1244 ordinary loss deduction.
- Consider Sec. 1202 Gain exclusion, if applicable. If certain requirements are met, gain could be excluded on the sale of Small Business Stock (“SBS”). The gain exclusion is the greater of $10 million or 10 times the cost of the SBS.
- Use the $14,000-per-recipient gift tax exclusion for 2017 by December 31. If the recipient has low income, the exclusion can be useful in transferring assets to the recipient that will immediately be sold and could be taxed at a 0% tax rate. Direct payments of medical bills and school tuition for others do not count towards this exclusion.
- Be sure to make deductible premium payments for self-employed health insurance, if applicable.
- Individuals with self-employment income that use the cash method of accounting might postpone sending out invoices until 2018.
- Companies that use the cash method of accounting also can delay sending out their invoices until the very end of 2017 or early 2018.
The Citrin Cooperman Federal Tax Policy Team will follow the legislative process closely and keep our clients apprised of the potential changes and consequences of the tax proposals. If you have any questions regarding current or proposed policy, please do not hesitate to reach out to a FTPT advisor.
- Companies that use the accrual method of accounting should meet with their tax adviser to see if delaying income is feasible.
- For Companies that use the cash method of accounting, accelerate expenses into 2017, when practical.
- Cash method companies can use credit cards to pay expenses prior to year-end and take the deduction in 2017, even though the bill is not paid until 2018.
- Cash method taxpayers should consider switching to the accrual method, if tax beneficial.
- Make business equipment purchases and place the items in service by December 31 to claim an expensing deduction. Include vehicles used for business in these plans. Accelerated depreciation deductions could also be available.
- Cash method businesses might pay employee bonuses in December while accrual method companies can accrue bonuses this year and make the payments by mid-March of next year in order to secure a tax deduction for 2017.
- Make sure shareholders of S Corporations and partners in partnerships have enough tax basis and at-risk amounts, in order to deduct losses that are passed through to them.
Please ask your Citrin Cooperman advisor if you would like more information on year-end tax planning.