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, most of this article will focus on individual income tax planning in light of the new legislation.
First, here are some of the major provisions impacting individual taxpayers:
- 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- Pease Limitation repealed– high-income individuals have been phased out of a portion of their itemized deductions when they crossed over a certain income limit ($261,500 of AGI for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 This will now be repealed.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. Also, mortgage indebtedness will be limited to $750,000 of the 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 increases the standard deduction (taxpayers must choose one or the other), most reports state that a tiny 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. Still, 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 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 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 itemize 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 lower 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 schools. 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 schools.
- “Bunching” deductions may start to make sense. Because of the large standard deduction, more taxpayers could make sense to “bunch” things like charitable contributions once every couple of 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 are 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 postcard 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.
