2017 Year-End Tax Planning in a Year of Uncertainty

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President Trump and the Republicans Congress are working to pass a new tax law. However, not all details are known. Furthermore, the current House and Senate bills differ on many significant provisions. Also, more revisions are expected as the two bills are reconciled and brought to the floor for votes. Finally, the Republicans failed to repeal the Affordable Care Act, so many provisions could change, if any changes are ever enacted.

With all the uncertainty, how do you plan? Very carefully – you need to augment your traditional year-end planning by anticipating likely changes.

Practical planning steps

First, be practical:

  • Determine what income and deductions you can move from 2017 to 2018 or vice versa.

    • Second, review the impact:

  • What happens if you shift any of these amounts of income and deductions to the other year?

    • Finally, watch for the impact of the Alternative Minimum Tax (“AMT”):

  • If the AMT is repealed next year, how does that change your analysis? Deductions lost to the AMT this year could have value in 2018.

    • Income

    Both the House and Senate bills lower the tax brackets, so income should be subject to less tax in 2018. Furthermore, if the Medicare tax is eliminated, pushing income into 2018 could save significantly.

    Conclusion: You probably want to move income to next year if you can.

    One possible exception is the sale of your home: both bills move the residency requirement from two of the last five years to five of the last eight years. So, if you are selling to sell a home you lived in less than five years, try to close in 2017.

    Exemptions and standard deduction

    Both bills raise the standard deductions to $12,000 single/$24,000 married. This may offset deductions that you lose, as discussed below.

    Conclusion: You probably want to move deductions to 2017.

    Itemized Deductions and Credits

    The deduction for state income taxes would be eliminated and deduction of property taxes either eliminated or capped at $10,000 (the current amount).

    Mortgage interest on new home purchases would be deductible only on loans of up to $500,000 on the primary residence only.

    And these deductions could be eliminated: student loan interest, moving expenses, tax preparation fees, casualty losses, medical expenses. Also, the deduction of alimony could be eliminated for divorces occurring after 2017 and electric car credits and bike to work exclusions could end.

    Conclusion: If these deductions are capped or eliminated, you will want to move these amounts into 2017.

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    Pass-through businesses

    Income from an LLC, partnership or S Corporation could see a top tax rate of 17.4 to 25%. However, to avoid abuse (as seen with a similar law in Kansas), rules would be applied so that taxpayers will not simply create entities to have all of their income tax at the lower rate.

    Conclusion: wait and see, read the fine print, then see if there are any opportunities to exploit.

    Estate taxes

    Either the tax on estates would be eliminated or the credit doubled.

    Conclusion: you may want to postpone your year-end gift planning.

    Summary

    Carefully review any income and deductions that you can still affect to see if moving will lessen the total taxes you pay for 2017 and 2018.

    Good luck and best wishes for the holidays!