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It’s the Most Wonderful Time of the Year…-End Planning! (Revised November 30, 2017)

    

 

 

 

 

Authors: Erica Sepulveda, Tax Senior and John Richards, Tax/Audit Associate

It’s the Most Wonderful Time of the Year…-End Planning! (Revised November 30, 2017)

Year end tax planning – most likely the last thing on the average individual’s list of things to do during this time of year.  However, tax planning will take on extra significance and complexity this year despite the uncertainties with the enactment of the final tax reform, currently pending passage by Congress effective for tax years beginning after December 31, 2017. This is with the exception of mortgage interest and expensing  deductions, which carries effective dates of November 2, 2017.

Although the Senate and House tax bills differ in some aspects, the net result of these proposed changes will likely have a significant impact on most individual taxpayers.  Summarized below are significant tax reform provisions impacting personal tax returns while planning for the 2018 tax year. Also included are considerations that taxpayers may want to think about in anticipation of the final tax reform legislation.

Take a look at these proposed changes.

 

Provision

Current Tax Law

Senate

House

Consideration

Standard deduction

Single: $6,350
Joint: $12,700

Single: $12,000
Joint: $24,000

Single: $12,000
Joint: $24,000

As the standard deduction
will more than double in 2018, consider accelerating expenses for the
itemized deductions in 2017.

Individual tax rates

10%, 15%, 25%, 28%, 33%,
35%, and 39.6%

10%, 12%, 22%, 24%, 32%,
35% and 38.5%

0%, 12%, 25%, 35%, and
39.6%

Consider deferring income
to 2018 and accelerating expenses before year-end as a strategy to lower
taxable income for 2017.

Capital gains rates

0, 15% and 20%; 28% for
collectibles

No change to long-term
gain rates as noted in the current law. Short-term gain rates will be taxed
at the new ordinary income tax rates.

No change to long-term
gain rates as noted in the current law. Short-term gain rates will be taxed
at the new ordinary income tax rates.

Consider harvesting
losses to offset gains from sales of investment securities.

Alternative Minimum Tax
(AMT)

The AMT is an income tax
imposed at nearly a flat rate on an adjusted amount of taxable income above a
certain threshold. If you have a higher income, you may be subject to the AMT.
Currently, this tax intends to ensure that high-earning tax filers(typically making income between $200K to $1 million),
pay at least some tax by disallowing many tax breaks.

Repeal of the AMT

Repeal of the AMT

Accelerating income and
deferring deductions only applies if you are being bumped up to a higher
bracket.  Take advantage of the tax breaks not offered when AMT was
applicable in your situation.

Mortgage interest

– Up to $ 1 million of acquisition indebtedness, whether on a
principal residence or second home
– Interest on up to $100K in home
equity indebtedness.

Disallowance of home
equity loan interest (no grandfather provision for existing loans)

No change for the
following
: – mortgage
debt incurred prior to 11/2/2017
– written binding contracts entered into prior to 11/2/2017 will be
treated as debt incurred prior to 11/2/2017
– Debt refinanced after 11/2/17

Changes for mortgage debt incurred after 11/2/2017:
– Mortgage debt incurred would be deductible only if secured by the tax
payer’s principal residence and only up to $500K indebtedness
– No interest deductibility for second-home mortgages and/or equity loans

Accelerating one month’s
mortgage payment from early January to late December can create a higher
interest deduction in 2017 – Check with your mortgage lender to confirm
that the payment would be reflected on the 2017 Form 1098

State and local taxes
(SALT)

Under current law, for
purposes of determining their regular income tax liability, tax payers may
deduct certain State and local taxes paid, including individual income taxes,
real property taxes, and personal property taxes.

Repeals deduction

Allow up to $10,000 of
property taxes paid on the taxpayer’s principal residence. All other would be
eliminated.

– Acceleration of these
items in 2017 to create a higher deduction in 2017.
– SALTS are still
fully deductible for businesses. –
Consider allocating a portion of property taxes as a home-office deduction if
the taxpayer is a business owner with a home office.

Medical expenses

Allowed deduction if the
cost exceeds 10% of the taxpayers’ adjusted gross income.

No change

Repeals deduction

Consider accelerating
medical expenses in 2017 if possible, as the proposed increase in the
standard deduction will likely not make itemizing worthwhile in 2018.

Charitable deductions

General deduction is up to 50 percent
of adjusted gross income, but 20 percent and 30 percent limitations apply in
some cases

No change

No change

Consider accelerating
contributions in 2017 as the proposed increase in the standard deduction will
likely not make itemizing worthwhile in 2018.

Miscellaneous itemized
deductions

Various deductions to
include tax preparation fees, investment expenses, unreimbursed employee
expenses etc.… Under
current tax law, these deductions are allowed only to the extent that the
aggregate of such deductions exceeds 2 percent of adjusted gross income

Repeals full deduction at
the individual level.
Tax preparation fees would continue to be deductible to businesses.

Repeals full deduction at
the individual level.
Tax preparation fees would continue to be deductible to businesses.

– Consider pre-paying 2017 tax return
preparation fees and other applicable expenses in 2017.
– Tax preparation fees will continue
to be fully deductible to businesses.

Alimony expenses

Alimony is deductible by
the payer spouse, and the recipient spouse must include it in income.

No change

Repeals deduction

In regards to pending
divorce decrees, consider getting divorce agreements finalized by 2017 year end.

Moving expenses

Allowed as an
above-the-line deduction for moving expenses incurred in connection with
starting a new job under at at-least-50 mile rule

Repeals deduction

Repeals deduction

Consider moving to the
new location before 2018, and then finding a permanent position there;
abiding to code sec. 217(c)(A)

Education expenses

Two different education
savings plan and seven other education incentives.

Student Loan interest
will no longer be deductible

– Student Loan interest will no longer be
deductible
– Consolidates three of the
educational credits into an enhanced American Opportunity Tax Credit
– Simplified and expanded 529 savings plans to include K-12 expenses

Consider re-evaluating
options for tuition commitments, before being locked into 2018 law

SOURCE: IRS.gov and Wolters Kluwer News research

 

Plan ahead.

Once again, these are just proposals! While the vast majority of the changes would not take effect until next year, this is the best time to contemplate year-end moves.

Focusing on one of the provisions in isolation of the others could potentially give you an inaccurate picture.  Take some time to speak with a tax professional to help determine your potential tax impact as a result of the passage of the final legislation. As all of this tax talk can be a bit overwhelming, consider gifting yourself a consultation with a tax advisor who will have the knowledge to direct you in the right path.

(Information in this article as of November 30, 2017)


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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