The Trump administration and Congress have begun consideration of “tax reform” or, as many pundits have declared, “tax cuts”. Now, the “waiting game” begins to see just what form this consideration of revisions to the Internal Revenue Code will take. However, even Warren Buffett, the “Oracle of Omaha” has indicated that stock sellers who have capital gains should wait to see the outcome of tax proposals. This year, more than ever, year-end tax planning is very important.
A brief summary of proposals under consideration:
- Tax brackets are reduced from 7 to 3, with rates of 12, 25 and 35%, and an option for a fourth rate of 35%.
- The standard deduction would double to $12,000 for individuals and $24,000 for married couples.
- The increase in the standard deduction may give rise to elimination of many deductions which taxpayers itemize. Presently, much focus is on elimination of the deduction for state and local income taxes.
- An unspecified increase in the child care credit and a new $500 credit for non-child dependents (caring for the elderly).
- The corporate tax rate would drop to 20% from 35%.
- Consideration is being given to implementation of a new tax rate of 25% for “pass-through” entities such as partnerships, S corporations and sole proprietorships. Presently, the “pass through” nature of the income means it is taxed at the marginal rate of the recipient, often higher than the proposed percentage.
For Individuals, below are some considerations for year-end tax planning: (Please keep in mind that an individual’s unique circumstances should always be taken into consideration when devising a tax strategy and an expert well versed in wealth management and taxes should be consulted before ultimately deciding on a course of action.)
- The Social Security Administration announcedon October 13th that the maximum amount of wages in 2018 subject to the 6.2% Social Security tax (old age, survivor, and disability insurance) will rise from $127,200 to $128,700, an increase of a little more than 1%. By comparison, the 2017 wage base increased more than 7% over the 2016 wage base.
- There is a 3.8% surtax on certain unearned income. Deferral or minimization of Net Investment Income and Modified Adjusted Gross Income should be considered to reduce the impact of the surtax, especially in light of the current tax proposals.
- High income earners must be aware of the 0.9% additional Medicare tax and adjust year-end withholding to provide for the additional tax.
- Stockholders should consider taking losses this year while postponing taking gains depending on the outcome of the tax debate.
- Individuals should try to postpone income until 2018 and accelerate deductions into 2017 to lower their 2017 tax bill unless their filing status may change for the better in 2017 rather than 2018.
- Holders of traditional IRAs should consider converting a traditional-IRA into a Roth IRA if eligible to do so.
- Individuals ought to consider “re-characterizing” a Roth IRA to a traditional IRA if the Roth account declined in value following the conversion.
- If possible, taxpayers should defer a bonus as part of an income deferral strategy.
- Taxpayers ought to consider the use of a credit card to pay for deductible expenses in 2017 and paying their statement in 2018 when it arrives.
- Facing the possible elimination or curtailment of the state and local tax deduction, individuals should consider an increase in their state and local tax withholding or increasing those estimated payments in 2017 if it is anticipated that state and local income taxes may be owed next year. As stated above, the deduction for state and local taxes may be eliminated by Congress.
- Those who have “miscellaneous” itemized deductions, medical expenses and other itemized deductions should pull them into this year if it appears Congress will eliminate them.
- Persons turning the age at which they are required to take Required Minimum Distributions (“RMD”) from an IRA, 401k or other retirement plan ought to consider postponing those distributions until 2018 when they may be in a lower tax bracket. While an individual may have to take two distributions to meet RMD requirements if they postpone distributions, those distributions may be taxed at a lower effective rate.
- Persons participating in a health flexible spending account (FSA) should consider an increase in the amount they may set aside for next year if they set aside too little for this year.
- Also, Health Saving Account participants should bear in mind that if they become eligible in December of 2017 to make HSA contributions, they can make a full year’s worth of deductible HSA contributions for 2017.
- Individuals should take advantage of the per individual annual gift tax exclusion and make gifts sheltered by the exclusion before the end of the year and thereby save gift and estate taxes. The exclusion applies to gifts of up to $14,000 to each of an unlimited number of individuals. There has been some discussion in Congress of the elimination of the “death tax” (Estate Tax), but Maryland may still retain its own inheritance and estate tax scheme so gifting is still a good way to lower the size of an estate for tax saving purposes.
As to business and business owners year-end tax planning: (Please keep in mind that an business and business owner’s unique circumstances should always be taken into consideration when devising a tax strategy and an expert well versed in wealth management and taxes should be consulted before ultimately deciding on a course of action.)
- Businesses should consider making expenditures that qualify for the business property expensing option. For tax years beginning in 2017, the expensing limit is $510,000 and the investment ceiling limit is $2,030,000.
- Businesses also should consider buying property that qualifies for the 50% bonus first year depreciation if bought and placed in service this year (the bonus percentage is due to decline to 40% next year). The bonus depreciation deduction is permitted without any proration based on the length of time that an asset is in service during the tax year. As a result, the 50% first-year bonus write-off is available even if qualifying assets are in service for only a few days in 2017.
- Businesses contemplating large equipment purchases must watch the tax reform debate carefully as proposals reflect immediate expensing without limitation of depreciable assets, other than buildings, purchased after a certain date.
- With a dramatic reduction in corporate tax rates under consideration, a corporation should consider deferring income until 2018 if it will be in a higher bracket this year than next.
- A corporation (other than a “large” corporation) that anticipates a small net operating loss for 2017 (and substantial net income in 2018) may find it worthwhile to accelerate just enough of its 2018 income (or to defer just enough of its 2017 deductions) to create a small amount of net income for 2017. This will permit the corporation to base its 2018 estimated tax installments on the relatively small amount of income shown on its 2017 return, rather than having to pay estimated taxes based on 100% of its much larger 2018 taxable income.
- To reduce 2017 taxable income, consider deferring a debt-cancellation event until 2018.
- To reduce 2017 taxable income, consider disposing of a passive activity in 2017 if doing so will allow deduction of suspended passive activity losses.
These are just some of the year-end steps that can be taken to save taxes. Again, by contacting PK Law, we can assist in tax planning for businesses and individuals
This information is provided for general information only. None of the information provided herein should be construed as providing legal advice or a separate attorney client relationship. Applicability of the legal principles discussed may differ substantially in individual situations. You should not act upon the information presented herein without consulting an attorney of your choice about your particular situation. While PK Law has taken reasonable efforts to insure the accuracy of this material, the accuracy cannot be guaranteed and PK Law makes no warranties or representations as to its accuracy.