The latest thinking from Greenspring Advisors.

Planning Opportunities Within the New Tax Bill

J. Patrick Collins Jr., CFP®, EA

It appears the new tax bill, named the Tax Cuts and Job Act, may be signed into law before year-end.  Assuming this is the case, there are some planning opportunities to take advantage of both this year and beyond.  While a major provision of this bill is lowering the corporate tax rate, the majority of this article will be focused on individual income tax planning in light of the new legislation.

First, here are some of the major provisions impacting individual tax payers:

  • Seven tax brackets were retained and most of the tax brackets were trimmed by a few percentage points.
  • Personal Exemptions are eliminated– for 2017 and prior there was a Personal Exemption allowance of $4,050 per dependent.  These Personal Exemptions reduced a taxpayer’s adjusted gross income and in some cases, for large families, could be significant.
  • Pease Limitation repealed– high income individuals have been phased out of a portion of their itemized deductions when they crossed over a certain income limit ($261,500 of AGI for individuals and $313,800 for married couples).  This will now be repealed.
  • Certain itemized deductions are curtailed or disallowed– there will now be a $10,000 total cap on state income taxes and real estate taxes.  In addition, mortgage indebtedness will be limited to $750,000 of loan value.  Casualty losses will not be allowed (unless in a national disaster area), and miscellaneous itemized deductions will also be disallowed.
  • Standard Deduction will rise to $24,000 for married couples– because the new law disallows many itemized deductions, and also increases the standard deduction (taxpayers must choose one or the other), most reports are stating that a very small percentage of households will itemize deductions in the future (versus about 30% today).
  • Alternative Minimum Tax (AMT) is not eliminated, but exposure is greatly reduced.  There are only a few instances we can think up where AMT will impact our clients.
  • Qualified Business Income for Pass Through Entities– we could write a few pages on this controversial topic, but the overall theme is that pass through businesses (LLC, S-Corp, Partnerships, etc.) will be able to take a 20% deduction on the income “passed through” to its owners if they meet several criteria.  There are several different forms of limitations to try to prevent abuse so this is a topic we will be exploring in much more depth in the coming weeks and months
  • The estate tax will double to around $22 million per couple– this puts the estate tax out of reach for the vast majority of Americans.

Here are some of some of the planning opportunities we have identified given this new tax bill:

  • Pay all state income taxes that may be due for 2017 by 12/31/2017– this year you will be able to itemized these deductions.  Next year they will be curtailed.  One item to note- if you are paying AMT, these will still be disallowed, so paying state income taxes early won’t help your tax situation
  • Pre-pay real estate taxes for 2018, if possible
  • Depending on your income in 2018 and beyond, consider accelerating charitable contributions since you may get a bigger “bank for your buck” this year, given the lowering of tax rates in 2018 and beyond
  • Similarly, for those that can “push” income into 2018 the same logic applies.  When you have lower marginal rates in the future it is better to realize income in those years.
  • The new tax bill will allow 529 plan assets to pay for secondary and elementary school.  While we typically want clients to hold these assets as long as possible to maximize tax-free growth, this does provide flexibility to pay for private school
  • “Bunching” deductions may start to make sense– because of the large standard deduction, it could make sense for more taxpayers to “bunch” things like charitable contributions once every couple years to ensure they get over the $24,000 standard deduction in certain years.
  • Privately held businesses will find opportunities for planning around the pass through rules.  Notably, shifting income/interests to children may qualify them for pass through status effectively lowering the family’s overall tax burden.

Given this bill was over 1,000 pages long, there is sure to be more tax planning opportunities to take advantage of in the coming months and years.  Unfortunately, the idea of being able to complete your taxes on a post card will have to be postponed until the next reform!  We will continue to monitor and evaluate the bill over the coming months and keep you abreast of strategies we believe are worthy of consideration.