2017 Tax Reform:  Last-Minute Year-End Moves Considering the Tax Cuts and Jobs Act

December 21, 2017

With the Tax Cuts and Jobs Act headed for the President's desk to be signed, Congress has enacted the biggest tax reform law in thirty years.  The law will make fundamental changes in the way taxes are calculated for individuals and businesses.  Since most of the changes will go into effect next year, there's still time for last minute moves before year-end to avoid the impact of disappearing deductions and save taxes.  The following are a few examples:

Lower Tax Rates
The Tax Cuts and Jobs Act will reduce tax rates for many taxpayers, effective for the 2018 tax year. The general plan of action to take advantage of lower tax rates next year is to defer income into next year.

  • If converting a regular IRA to a Roth IRA, postpone the conversion until next year. The income from the conversion will be deferred until next year when the rates are lower.  
  • If you already converted a regular IRA to a Roth IRA earlier in the year, consider unwinding the conversion to the Roth IRA by doing a re-characterization making a trustee-to-trustee transfer from the Roth to a regular IRA. This way, the original conversion to a Roth IRA will be cancelled out. The re-characterization must be completed before year-end. Starting next year, the option to use a re-characterization to unwind a regular-IRA-to-Roth-IRA conversion will not be available.  
  • For a business on the cash basis, income earned isn't taxed until cash is received.  Consider deferring income by holding billings until next year or until so late in the year that no payment will likely be received this year.
  • For a business on the accrual basis, deferral of income until next year is difficult but not impossible. For example, with due regard to business considerations, consider postponing completion of a last-minute job until 2018 or defer deliveries of merchandise until next year (if doing so won't upset customers). Taking one or more of these steps would postpone the right to payment and the income from the job or the merchandise, until next year. Keep in mind that the rules in this area are complex and may require a tax professional's input.
  • The reduction or cancellation of debt generally results in taxable income to the debtor. Consider postponing action until January to defer any debt cancellation income into 2018 if you are planning to make a deal with creditors involving debt reduction.
Disappearing or Reduced Deductions; Larger Standard Deduction

Beginning next year, the Tax Cuts and Jobs Act suspends or reduces many popular tax deductions in exchange for a larger standard deduction. Below are suggestions on what can be done about this right now:

  • Individuals (as opposed to businesses) will only be able to claim an itemized deduction of up to $10,000 ($5,000 for a married taxpayer filing a separate return) for the total of (1) state and local property taxes; and (2) state and local income taxes. To avoid this limitation, pay the last installment of estimated state and local taxes for 2017 no later than Dec. 31, 2017, rather than on the 2018 due date. But, don't prepay in 2017 your 2018 state income tax liability that will be imposed next year.  Congress says such a prepayment won't be deductible in 2017. However, Congress only forbade prepayments for state income taxes, not property taxes, so a prepayment on or before Dec. 31, 2017, of a 2018 property tax installment is apparently acceptable.
  • The itemized deduction for charitable contributions will not be reduced.  Because most other itemized deductions will be eliminated in exchange for a larger standard deduction (e.g., $24,000 for joint filers), charitable contributions after 2017 may not yield a tax benefit for many because they won't be able to itemize deductions. Consider accelerating some charitable giving into 2017 in anticipation of not being able to itemize deductions in 2018.
  • The new law temporarily increases itemized deductions for medical expenses. For 2017 and 2018 these expenses can be claimed as itemized deductions to the extent they exceed a floor equal to 7.5% of your adjusted gross income (AGI). Before the new law, the floor was 10% of AGI, except for 2017 it was 7.5% of AGI for age-65-or-older taxpayers. Keep in mind that next year many individuals will have to claim the standard deduction because many itemized deductions have been eliminated. If not able to itemize deductions after this year, but able to itemize this year, consider accelerating "discretionary" medical expenses into this year. For example, consider getting new glasses or contacts or getting extensive dental work done before the end of the year,

Other Year-End Strategies
Here are some other last-minute moves that can save tax dollars in view of the new tax law:

  • Bonus depreciation: The immediate deduction increases for bonus depreciation from 50% to 100% for assets placed in service after September 27, 2017. The bill also expands the eligibility of property to include used property after this date. This remains in effect until 2022. Consider accelerating purchases qualifying for bonus depreciation into 2017 for a 100% write off offsetting higher income taxed income.
  • The new law substantially increases the alternative minimum tax (AMT) exemption amount, beginning next year. There may be steps now to take advantage of that increase. For example, the exercise of an incentive stock option (ISO) can result in AMT complications. Consider postponing the exercise of any ISOs owned until next year. Depreciation and the investment interest expense deductions, may be curtailed if you are subject to the AMT. If the higher 2018 AMT exemption means no AMT for 2018, it may be worthwhile, via tax elections or postponed transactions, to push such deductions into 2018.
  • Like-kind exchanges are a popular way to avoid current tax on the sale of an asset reinvested into another piece of property, but after December 31, 2017, such swaps will be possible only if they involve real estate that isn't held primarily for sale. If considering a like-kind swap of other personal property, such as equipment in your trade or business, do so before year-end.  Like kind exchanges of personal property will still qualify where either the relinquished property is disposed or the replacement property is acquired on or before December 31, 2017.
  • The new law suspends the deduction for moving expenses after 2017 (except for certain members of the Armed Forces) and also suspends the tax-free reimbursement of employment-related moving expenses. If in the midst of a job-related move, try to incur deductible moving expenses before year-end, or if the move is connected with a new job and reimbursed by the new employer, press for a reimbursement to be made before year-end.
  • Under current law, various unreimbursed employee business expenses are deductible as itemized deductions if those expenses plus certain other expenses exceed 2% of adjusted gross income. The new law suspends the deduction for unreimbursed employee business expenses paid after 2017. Determine whether paying additional employee business expenses in 2017 that would otherwise be paid in 2018, would provide an additional 2017 tax benefit.

Please keep in mind that these are only some of the year-end moves that should be considered in light of the new tax law. Since the President is expected to sign the Tax and Jobs Act in early January and most of the new law changes are effective for 2018, more information will be made available early next year.  If you would like more details about any aspect of the new law, please do not hesitate to contact us.

How may we help you?

 

Accounting News