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(Un)conventional Wisdom on the Pending Tax Legislation

Pete Palmer, Tax Principal

(Un)conventional Wisdom on the Pending Tax Legislation

As the holiday season ramps up to its heights, at press time we are awaiting President Trump’s signature on tax legislation (Tax Cuts and Jobs Act, or TCJA) that many experts say will impact virtually every individual and business on a level not seen in over 30 years. As with any tax bill, however, there will be “winners”and “losers.” The bill calls for lowering the individual and corporate tax rates, repealing countless tax credits and deductions, enhancing the child tax credit, boosting business expensing, and more.

This final bill carries a January 1, 2018, effective date for most provisions. Many of the changes to the Internal Revenue Code in the Conference bill are temporary. This is true especially with respect to the provisions of the bill impacting individuals. This decision was made in order to keep the bill within budgetary parameters, but with no guarantees that a future Congress would extend them.

Given the effective date for most of the provisions, the question naturally asked is “what should I/we do before the end of 2017” to get the best tax result from this transition. While we certainly can’t go over all of the nuances of what is coming in a general email, here are a few things we do know:

  • Fewer individuals will itemize their deductions on Form 1040, Sch A in 2018 as a result of the outright repeal of certain previously deductible items, as well as limitations placed on others, most notably state and local income and property taxes, combined with the near doubling of the “standard deduction”.
  • Preferential rates for qualified dividends and capital gains remain in place as under current law, as do the ACA-related additional taxes, including the net investment income tax for higher income taxpayers.
  • The alternative minimum tax (AMT) survives with modifications. For many Californians, in its current form AMT effectively eliminates the tax benefits of certain itemized deductions, including state and local income and property taxes. It’s anticipated that far fewer persons will be impacted by AMT starting in 2018.
  • The federal estate tax survives, but with a doubling of the estate and gift tax exclusions after December 31, 2017 and before January 1, 2026.
  • Provisions regarding the acceleration of business deductions in the form of bonus depreciation and asset expensing kick in as early as September 27, 2017.

In light of this new reality (almost), here are some prudent steps you can take before year end:

  • Review Form 1040 Sch A, line 9 of your 2016 tax return. If the number shown is greater that $10k (and 2016 was a relatively typical year for you and thus somewhat predictive of 2017 and 2018), the portion over $10k will not be available to offset income in 2018 as a deduction. As such, if you have pending tax payments scheduled for the first quarter of 2018, including 2017 fourth quarter state estimated tax payment, the second installment of the 2017-2018 real estate taxes, and any DMV fees renewable in early 2018 already invoiced, consider paying those by December 31, 2017. CAUTION: Due to the current version of AMT in place for 2017, the federal tax benefit of making these payments early may be eliminated.
    • NOTE: taxes of these types that are deducted on other schedules of your return to offset trade or business, farming, or rental income remain deductible. For example, property taxes that you pay for a residential rental you own will continue to be deductible in 2018.
  • If you have a home equity loan with a balance outstanding thereon, considering paying it down or off, and certainly make the payment due in January well in advance of December 31, 2017 so that the lender credits the interest paid to 2017 tax year. Starting in 2018, interest on home equity loans will become nondeductible.
  • If you have large amounts of so-called “miscellaneous itemized deductions”, such that the 2016 Form 1040, Sch A, line 27 of your return has a number more than zero (and 2016 was a relatively typical year for you), consider prepaying those type of expenses if feasible. CAUTION: Due to the current version of AMT in place for 2017, the federal tax benefit of making these payments early may be eliminated.
  • If you were considering making large equipment or other such purchases for your business, enhanced expensing options may be available to reduce income in 2017 that were not expected when the year began.
  • Review charitable giving and consider additional donations before the end of the year. This “tried and true” tax strategy takes on added importance in 2017 with many itemized deductions limited or eliminated in 2018. Besides, it makes you feel good to help someone else!

As noted above, in many cases the effect of AMT makes it problematic to assess whether accelerating certain payments in December 2017 will in fact make a difference in your 2017 tax bill. We do know though that many of the deductions potentially impacted by AMT in 2017 will be gone or severely limited in 2018 if the TCJA legislation is signed into law as expected.

We are happy to respond to your questions that may be more unique to your situation, and stand ready to make the detailed computations required if necessary.

Most of all, don’t let these gymnastics in Washington DC detract from what we hope will be a great holiday season for you and your families!

 

 

PKC Kuebler, APC is a full-service public accounting firm registered and licensed to practice as an accountancy corporation by the California Board of Accountancy . The information provided is intended for general tax and accounting needs. Articles are written for informational purposes only and should not be seen as any kind of advice. Content is accurate and true to the best of our knowledge, however, there may be omissions, errors or mistakes and it is advised you contact your CPA before taking any financial action. The opinions expressed in our articles do not reflect the opinions of any organizations in which we are affiliated with.

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