Last Minute Tax Savings to Consider Before 2018 Tax Reform Hits
Deductions and savings to take advantage of before they’re gone
By now you’ve likely heard that President Trump has officially signed off on one of the largest tax reform laws in three decades. As expected, there will be a higher standard deduction in exchange for the reduction or elimination of popular itemized deductions for individuals. While most of these changes will not go into effect until 2018, there is still time to maximize the tax breaks that are still available in 2017 and take action to favorably position yourself for the 2018 tax year.
Lower tax rates
The new tax law will reduce tax rates for many taxpayers for the 2018 tax year. Businesses operating as passthroughs, such as partnerships, will also likely experience lower tax bills. There will be a 20% deduction for certain LLCs, partnerships, sole proprietorship and S Corporation’s business income. This deduction could reduce your taxable income and is available to you whether or not you itemize. For C Corporations, there will be a 21% flat rate, effective January 1, 2018.
To take advantage of lower tax rates next year, you can defer current income into next year. Here are a few ways of accomplishing this:
- Postpone converting a regular IRA to a Roth IRA until next year so that it is taxed at lower rates.
- If you already converted a regular IRA to a Roth IRA in 2017, you can unwind the conversion by doing a re-characterization, making a trustee-to-trustee transfer from the Roth to a regular IRA. If you complete the re-characterization by year end, this will cancel out the original conversion. Starting next year, you will not be able to use a re-characterization to unwind a regular IRA to Roth IRA conversion.
- If your business operates on the cash basis, the income you earn is not taxed until your clients pay for those services. If you postpone billing until next year, or wait until it’s too late to receive payment this year, you will likely succeed in deferring income until next year.
- For businesses using the accrual basis, deferring income until next year may be more difficult, but still a viable option. If possible, you can postpone last minute jobs until 2018, or delay deliveries of goods until 2018. This will postpone your right to payment and therefore the income from those jobs or goods will be deferred to 2018. Due to complex rules surrounding this method, we recommend consulting with our tax professionals.
- The reduction or cancellation of debt generally results in taxable income to the debtor. If you are planning to make a deal with creditors involving debt reduction, it may be a good idea to postpone action until January to defer any debt cancellation income into 2018.
Larger standard deduction
While the tax bill suspends or reduces many current tax deductions, there will be a larger standard deduction available to taxpayers. The new standard deduction is $24,000 for married individuals filing jointly, $18,000 for head-of-household filers and $12,000 for individual filers.
- Prepay your 2018 property tax installments. Individual taxpayers will only be able to claim an itemized deduction of up to $10,000 ($5,000 for married taxpayers filing separately) for the total of state and local property taxes, and state and local income taxes. In order to avoid this limitation, you can pay the last installment of estimated state and local taxes for 2017 by December 31, 2017. However, do not prepay in 2017 a state income tax bill that will be imposed in 2018 since Congress has stated that such payments will not be deductible in 2017. While Congress stated this for prepayments of state income taxes, there was no mention of prepaying 2018 property tax installments before December 31, 2017.
- Give more to charity. The itemized deduction for charitable contributions will not be eliminated. However, because most other itemized deductions will be eliminated in exchange for a larger standard deduction, any charitable contributions made after 2017 may no longer lead to a tax benefit for many taxpayers since they won’t be able to itemize deductions. Consider accelerating your charitable giving in 2017 if you think you fall in this category.
- Get some glasses. The new tax law will temporarily boost itemized deductions for medical expenses. For 2017 and 2018 those expenses can be claimed as itemized deductions if they exceed a floor equal to 7.5% of your adjusted gross income (AGI). This was previously set at a floor 10% of AGI and 7.5% of AGI for those aged 65 and older. For the individuals that plan to claim the standard deduction in exchange for itemized deductions next year, consider itemizing and accelerating “discretionary” medical expenses in 2017. This may include glasses, contacts, or expensive dental work.
Additional end of year tax saving tips
- Take a look at your stock options. The alternative minimum tax (AMT) exemption amount will be substantially increased next year (exercising an incentive stock option (ISO) can often result in AMT complications). To take advantage of this increase, if you hold ISOs, it may be a good idea to postpone exercising them until next year when the increase is in place.
- Move up your property exchange. As of December 31, 2017, like-kind exchanges will only be possible if they involve real estate that isn’t held primarily for sale. If you are considering a like-kind swap of other types of property, doing so before year end is likely worthwhile. The old law rules will continue to apply to exchanges of personal property if you dispose of the relinquished property or acquire the replacement property on or before December 31, 2017.
- Take your clients to a show. The new law eliminates the 50% deduction of business-related entertainment. Previously, half the cost could be deducted, however, beginning in 2018 this deduction will no longer be available. Note that the deduction for 50% of food and beverage expenses associated with a trade or business will be retained.
- Rethink your alimony agreement. Alimony payments will no longer be deductible by the payor and may no longer be included in the income of the payee. For couples currently in the process of a divorce or separation, this means that the payor would benefit from finalizing the divorce agreement before 2018, while the payee would benefit from finalization in 2019.
- Pay your moving expenses. Moving expenses will no longer be tax deductible in 2018 (with the exception of certain members of the Armed Forces) and the tax-free reimbursement of employment related moving expenses will also be suspended. For those currently in the process of moving for job-related reasons, it’s best to incur your deductible moving expenses by the end of the year. If you expect to be in a lower tax bracket in 2017, and if the move is to be reimbursed by a new employer, consider requesting that the reimbursement of taxable moving expenses be made before year end — if the employer’s policy allows.
- Set up a home office. Employee home office expenses will no longer be deductible in 2018. Current law allowed for an itemized deduction of employee business expenses if those expenses (plus certain other related expenses) exceeded 2% of the employee’s adjusted gross income. It’s recommended that you determine whether or not paying employee business expenses in 2017, rather than 2018, would allow you to take advantage of this tax benefit for 2017.
While these are just a few examples of year end actions you can consider, we recommend consulting with our tax professionals for a more in-depth look into your particular situation.
If you have questions about the new tax law, or want to learn more about how you can best prepare yourself for the 2018 tax year, please reach out to your SSF tax representative for more information.