2017/2018 Planning


The new Tax Cuts and Jobs Act affords us a crucial time frame to take advantage of a few last minute and once in a lifetime planning opportunities.  If you expect to itemize in 2017 or could potentially itemize by accelerating certain deductions from 2018 into 2017, you should consider the following, especially if you are unlikely to itemize in 2018 due to increases in the standard deduction ($12,000 for single taxpayers, $24,000 for married filing jointly):

2017

Medical

  • Prepay any medical, dental and vision insurance premiums or expenses before December 31st, 2017. You should also consider prepaying any upcoming scheduled doctor or dentist appointments along with any anticipated or recurring prescription medicine or qualifying medical equipment (hearing aids, wheelchairs, prescribed capital improvements, etc.).

Charitable

  • Make your donations of clothing, furniture, household items and other property in 2017.  This may be the last opportunity in your lifetime to take advantage of this deduction due to sweeping changes being made to standard and itemized deductions.  Consider a year-end clean out of cluttered attics, basements, spare bedrooms, garages and closets in your home.
  • Making a donation to a charitable donor fund (Morgan Stanley, Fidelity, Vanguard) prior to December 31st, 2017 will allow you to receive a deduction this tax year for donations you may not actually make for many years or decades to come.

Property Taxes & State and Local Income Taxes (These suggestions may not benefit you fully or at all if you’re subject to AMT)

  • Prepay property taxes which come due in the first quarter of 2018 in 2017.  You will likely need to call or visit your taxing authority’s office and find out what the bill will be.  This information is usually available by December 27th.  If your property taxes are escrowed, you may be unable to get your bank to pay these in advance but it’s still worth trying.
  • Prepay at least the expected balance you are anticipated to owe on your 2017 state income tax return.  Use an estimated income tax voucher and mail the payment before the end of the year.

Mortgage Interest & Investment Interest

  • Prepay your January 2018 mortgage payment as early as possible to ensure that the bank has enough time to process the payment before the end of the year.
  • Points on a pending home purchase should be prepaid prior to December 31st, 2017.
  • Prepay any investment interest expense due before the end of the year.

Miscellaneous Itemized Deductions (These suggestions may not benefit you if you’re subject to AMT)

  • Prepay your tax preparation fees, tax planning fees, estate planning fees, retirement planning fees, financial planning fees, investment management fees and other investment expenses by December 31st, 2017.
  • Pay any unreimbursed employee business expenses or job search expenses before the end of the year.
  • Consider prepaying for your safety deposit box.

Moving Expenses (Deductible without itemizing – eliminated in 2018)

  • Prepay any expenses for your job related move before the end of the year, including truck rentals, personal belonging transportation, temporary housing and other travel expenses.

Business

  • Defer income to 2018 and accelerate or prepay any expenses prior to December 31st.  Consider purchasing capital assets before the end of the year (equipment, vehicles, computers/point of sale systems, etc.).

2018

Mortgage/Housing

  • Pay off your mortgage even if it requires liquidating assets in order to do so. Taxpayers that are filing as married filing jointly will need to exceed $24,000 in deductions in order to exceed the new standard deduction ($12,000 for single taxpayers) and with the state and local tax (SALT) (which includes income, property, and sales taxes) deductions capped at just $10,000, crossing that standard deduction threshold will be challenging.  There will cease to be any tax benefit of continuing to pay interest on your mortgage and if you have the ability to, paying it off will grant you access to additional monthly income.
  • Consider renting housing instead of owning based upon the various tax deduction losses.

Taxes and Relocation

  • Downsize your personal residence to reduce the mortgage interest and/or the real estate taxes that you pay.  Due to the aforementioned capping of the SALT deduction, you will no longer be able to offset a portion of the cost of higher real estate taxes with a tax deduction.  It should also be noted that mortgage interest will only be deductible on new mortgages up to $750,000, starting January 1, 2018.
  • Relocating to a state with lower or no state income taxes and lower property taxes may result in significant savings, specifically for our clients living in California, Connecticut, Illinois, Maryland, New Jersey and New York that are subject to some of the highest taxes nationwide.

Pass-through 20% Deduction

  • For an individual taxpayer that owns a service industry (principal asset of the business is the reputation or skill of one or more of its employees, such as CPAs, doctors, dentists, lawyers, financial advisors) pass-through entity with income over $157,500 and under $315,000, being married to a spouse whose income combined with theirs is under $315,000 allows these taxpayers to qualify for the new 20% deduction of the qualified business income (limited to 50% of the W-2 wages paid with respect to the business or 25% of the W-2 wages paid plus 2.5% of capital assets, whichever is greater).  Married taxpayers with joint taxable income over $315,000 where one spouse owns a pass-through entity with taxable income over $157,500 but under $315,000 will not qualify for the new 20% deduction. 

Other Tax Reform Highlights

  • Medical expenses will be deductible for those that exceed 7.5% of their adjusted gross income.  This figure will return to 10% in 2019.
  • Personal exemptions have been eliminated. Taxpayers receive $4,050 in 2017 for each dependent on their tax return (including their spouse and themselves).  The significant increase to the standard deduction was substantially or more than offset by the elimination of all exemptions.
  • The Child Tax Credit will increase from $1,000 to a maximum of $2,000 per child with up to $1,400 of the credit being refundable.
  • The individual health insurance mandate as part of the Affordable Care Act will be repealed in 2019.  The health insurance penalty will be enforced for tax years 2017 and 2018.  The penalty for 2017 is 2.5% of your total household AGI, or $695 per adult and $347.50 per child, whichever is greater, up to a maximum of $2,085.
  • The estate tax exemption will allow up to $22 million to be passed to heirs tax-free for married taxpayers.
  • Alimony payments will no longer be tax deductible to the payer for divorces occurring after December 31, 2018. The new rule wouldn't affect anyone already paying alimony.
  • Corporations will see a massive tax cut as their rate will fall from 35% to just 21%.
  • Pass-through companies (S corporations, LLCs, partnerships, sole proprietorships) will be able to deduct 20% of their income tax-free. Service businesses (doctor’s offices, law firms, investment businesses) can take the 20% deduction only if they make up to $315,000 for married taxpayers ($157,500 for single taxpayers).
  • Qualified business property placed in service after September 27, 2017 and before January 1, 2023 is eligible for full (100%) expensing. For each year after 2023 through 2027, the amount eligible to be expensed will reduce by 20%.  Qualified property has also been expanded to include used property along with new.
  • Alternative Minimum Tax (AMT) has been eliminated entirely on the business side.  Many individual taxpayers will no longer be subject to the AMT as the exemption amounts have been increased and all taxpayers will lose the three biggest triggers for AMT that we have seen in our practice: personal exemptions, miscellaneous itemized deductions, and state and local taxes.
  • The student loan interest deduction, educator expense deduction ($250), and the graduate student tuition waivers were kept in the final bill.
  • Families that contribute to 529 college savings plans can now use these accounts to pay up to $10,000 per eligible student for private elementary or secondary schooling.

2018 Tax Brackets

Rate

Single/MFS

MFJ

Head of Household

MFS

10%

0 to $9,525

0 to $19,050

0 to $13,600

0 to $9,525

12%

$9,526 to $38,700

$19,051 to $77,400

$13,601 to $51,800

$9,526 to $38,700

22%

$38,701 to $82,500

$77,401 to $165,000

$51,801 to $82,500

$38,701 to $82,500

24%

$82,501 to $157,500

$165,001 to $315,000

$82,501 to $157,500

$82,501 to $157,500

32%

$157,501 to $200,000

$315,001 to $400,000

$157,501 to $200,000

$157,501 to $200,000

35%

$200,001 to $500,000

$400,001 to $600,000

$200,001 to $500,000

$200,001 to $300,000

37%

$500,001 and up

$600,001 and up

$500,001 and up

$300,001 and up