Proposed Tax Reform Provides Opportunities for Strategic Tax Planning
As of December 14, 2017, it is looking more likely that the Senate and House of Representatives will successfully reconcile differences in their respective tax reform bills and pass tax reform into law. The changes that would come into effect in 2018 create motivation for taxpayers to take certain actions before the end of 2017.
Timing of personal income and itemized deductions:
The current tax reform bills propose limits on state and property tax deductions as well as the mortgage interest deduction. Furthermore, the standard deduction is proposed to increase. Accordingly, most individuals would do well to follow the traditional tax adage “defer income and accelerate deductions”. If you currently itemize deductions, the following actions might be of benefit:
- If you make estimated tax payments, pay your 4th quarter state estimate on or before 12/31/17 (if you have been subject to alternative minimum tax [AMT] in the past, please contact us before making this payment).
- Prepay all or a portion of next year’s property taxes on or before 12/31/17. Prepayments can be made to your county collector’s office.
- Make charitable contributions on or before 12/31/17 that you had planned to make in 2018.
- Pay your January 2018 mortgage payment on or before 12/31/17.
Individuals filing as single who typically have itemized deductions in a range from $6,000-$12,000 (or married joint filers with $12,000-$24,000 in itemized deductions) or with a high level of state income tax and/or property tax will generally receive the most benefit from accelerating itemized deductions into 2017.
If you can defer a monthly IRA distribution form December 2017 to January 2018, or defer income in any other way, that might also be advisable.
Timing of business income and deductions:
Due to a general reduction in tax rates and new reduced tax rates on business income in the tax reform bills, it will often be advisable (more often than most years) to defer income and accelerate expenses. It never makes sense to spend a dollar to save 30 cents in taxes. But if you have purchases you need to make in the near future, accelerating those expenses into 2017 will likely result in greater tax savings than incurring the same expense in 2018. Similarly, income may be deferred by delaying billings (cash-basis taxpayers) or delaying deliveries (accrual-basis taxpayers).
This letter outlines a few of the planning steps that we would recommend the most broadly among our clients. Yet this letter covers only a very small portion of the tax reform bills, and only a small portion of the potential planning steps that could be appropriate before the end of 2017. If you want to consider any of these actions or talk about additional planning ideas that might apply to your specific tax position, get in touch with your Martin Hood contact and have a discussion about the details of your tax position for 2017 and 2018. There are situations in which the general advice will not hold true in specific situations, so we recommend that you contact us before taking any significant action.