The President recently signed into law the Tax Cuts and Jobs Act (TCJA), representing the broadest reform of our tax laws in three decades. As part of our ongoing effort to keep you up to date on tax law changes which may affect you and your business, we have compiled the following summary of the key reforms that will go into effect next year and some of the actions you may wish to consider before December 31 to improve your tax position going forward. We encourage you to review this information now and contact us with any questions you may have.
Tax Planning Opportunities
In general, it is advisable to take advantage of lower tax rates next year by deferring income into next year or by accelerating deductions into this year. For example:
Individual Tax Planning Strategies
- Make state and local tax payments before December 31, 2017. After 2017, 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. If you itemize your deductions and are not subject to the Alternative Minimum Tax (AMT) you may want to consider prepaying the last installment of estimated state and local taxes for 2017 no later than December 31, 2017, rather than on the 2018 due date.
- An important note: Don’t prepay in 2017 a state income tax bill that will be imposed in 2018 since, according to Congress, that prepayment won’t be deductible in 2017. However, this rule only applies to state income taxes, not property taxes, so a prepayment on or before December 31, 2017, of a 2018 property tax installment is advantageous.
- Postpone converting a regular IRA to a Roth IRA until 2018. This will allow you to defer income from the conversion until next year and have it taxed at lower rates.
- If you’ve already converted to a Roth IRA, consider recharacterization. If you have already converted a regular IRA to a Roth IRA but the lower tax rate available in 2018 makes you think twice about this move, you may wish to unwind the conversion by doing a recharacterization and making a trustee-to-trustee transfer from the Roth to a regular IRA. This will cancel out the original conversion to a Roth IRA but only of you take action before December 31, 2017. In 2018, you won’t be able to use a recharacterization to unwind regular-IRA-to-Roth-IRA conversions.
- Delay large gifts. If you are considering making a large gift which would result in gift taxes, it may be advantageous from a tax perspective to delay them until 2018.
- Postpone debt cancellation. The reduction or cancellation of debt generally results in taxable income to the debtor, therefore if you are planning to negotiate with creditors involving debt reduction, consider postponing the action until January to defer any debt cancellation income into 2018.
- Accelerate charitable contributions. Consider accelerating 2018 charitable contributions to 2017 if your itemized deductions will not exceed the new larger standard deduction in 2018.
- Take advantage of the increased AMT Exemption. The new tax law substantially increases the alternative minimum tax (AMT) exemption amount, beginning next year. There may be steps you can take now to take advantage of that increase such as not exercising an incentive stock option (ISO), which can result in AMT complications, until next year. Some deductions, such as depreciation and the investment interest expense deduction, will be curtailed if you are subject to the AMT. If the higher 2018 AMT exemption means you won’t be subject to the 2018 AMT, it may be worthwhile, via tax elections or postponed transactions, to push such deductions into 2018.
- Moving Expense Deduction Suspended. The new law suspends the deduction for moving expenses after 2017 (except for certain members of the Armed Forces), and suspends the tax-free reimbursement of employment-related moving expenses. If you are in the midst of a job-related move now, try to incur your deductible moving expenses before year-end. If the move is connected with a new job and you are getting reimbursed by your employer, ask for a reimbursement to be made to you before year-end.
Business Tax Planning Strategies
- Cash basis businesses should defer billings. If you run a business that renders services and operates on a cash basis, the income you earn isn’t taxed until your clients or patients pay. Deferring billings until next year will reduce your taxable income for this tax year.
- Accrual basis businesses can also defer income. Although it is more difficult, accrual basis businesses can defer income until next year. For example you may be able to postpone the completion of a last-minute job until 2018, or defer deliveries of merchandise until next year which can postpone payments and the income from the job or the merchandise, until next year. The rules in this area are complex, so feel free to reach out to us if needed.
- Accelerate like-kind exchanges. Like-kind exchanges are a popular way to avoid current tax on the appreciation of an asset, but after December 31, 2017, they will be possible only if they involve real estate that isn’t held primarily for sale.
- Accelerate business entertaining costs. For decades, businesses have been able to deduct 50% of the cost of entertainment directly related to or associated with the active conduct of a business. However, under the new law, for amounts paid or incurred after December 31, 2017, there’s no deduction for such expenses.
In addition, there are changes to deductions for meal expenses for businesses. While individual taxpayers are still generally able to deduct 50% of the food and beverage expenses for meals consumed during work travel, for meal expenses incurred and paid after Dec. 31, 2017, and until Dec. 31, 2025, the act expands this 50% limitation to expenses of the employer associated with providing food and beverages to employees through an eating facility that meets requirements for de minimis fringes and for the convenience of the employer. Such amounts incurred and paid after Dec. 31, 2025, will not be deductible.
- Accelerate employee business expenses. Under current law, various 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 employee business expenses paid after 2017. If you are employed, you may also wish to ask your employer to start reimbursing you for the types of employee business expenses that you have been paying yourself up to now, and lowering your salary by an amount that approximates those expenses. In most cases, such reimbursements would not be subject to tax.
Key Changes in the Tax Cuts and Jobs Act
The following are additional details regarding the new tax law as it applies to individuals and businesses:
Changes and considerations for individuals:
One of the benefits of the TCJA, for some individuals, is lower tax rates. There will be seven individual income tax brackets under tax reform. The top individual income tax rate for ordinary income will be 37%.
Here are the tax rates for married individuals filing joint returns and surviving spouses:
|If taxable income is:||The tax is:|
|Not over $19,050||10% of taxable income.|
|Over $19,050 but not over $77,400||$1,905, plus 12% of the excess over $19,050.|
|Over $77,400 but not over $165,000||$8,907, plus 22% of the excess over $77,400.|
|Over $165,000 but not over $315,000||$28,179, plus 24% of the excess over $165,000.|
|Over $315,000 but not over $400,000||$64,179, plus 32% of the excess over $315,000.|
|Over $400,000 but not over $600,000||$91,379, plus 35% of the excess over $400,000.|
|Over $600,000||$161,379, plus 37% of the excess over $600,000.|
Individual Tax Deductions:
There are several deductions that will be eliminated or reduced, which may or may not be offset by a larger standard deduction:
- 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.
- Under current rules, alimony payments generally are an above-the line deduction for the payer and included in the income of the payee. Under the new law, beginning in 2019, alimony payments aren’t deductible by the payer or included in the income of the payee, generally effective for any divorce decree or separation agreement executed after 2018. For any divorce decree or separation agreement executed prior to 2019, the new law will apply if such agreement is modified after 2018 and the modification expressly provides that the new law applies to the modification.
- The itemized deduction for charitable contributions won’t be eliminated, however, 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 you because you won’t be able to itemize deductions.
- The new law temporarily boosts 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. It is important to be aware that that next year, many individuals will have to claim the standard deduction because many itemized deductions have been eliminated.
- The principal residence mortgage interest deduction will be limited to interest on $750,000 of indebtedness, for loans after 2017.
- The following personal exemptions will be eliminated: the deduction for home equity debt, miscellaneous itemized deductions subject to the 2% floor (e.g., investment advisory fees and tax preparation fees), the Pease rule (i.e., phase-out of itemized deductions), the deduction for casualty losses (except for federally declared disasters), and moving expenses (except for certain military personnel).
- Estate, Gift and GST tax exemptions will double to $10 million (expected to be $11.2 million for 2018 with inflation indexing). Thus, for a married couple the combined exemptions would be $22.4 million in 2018.
Notable items that are not changing for individuals include:
- The preferential top rate (i.e., 20%) on capital gains and qualified dividends.
- Annual exclusion gifts ($15,000 for 2018).
- The 3.8% net investment income tax is not changing, thus, net investment income (e.g., interest, dividends, capital gains, annuity income, rents, etc.) will be taxable to the extent it exceeds the applicable thresholds (e.g., single taxpayers $200,000, married filing jointly $250,000).
- A taxpayer’s ability to sell specific lots of securities. The original tax reform bills in the House and Senate would have forced FIFO treatment for the sale of securities (e.g., stocks).
- Stretch-out distributions for beneficiaries of IRAs and other qualified plans.
- Rules for excluding gain on the sale of a principal residence.
Changes and considerations for businesses:
One of the key benefits of the TCJA for businesses is lower tax rates for C-corporations effective in the 2018 tax year. For businesses that are considered “pass-through” (such as partnerships, limited liability companies taxed as partnerships or S-corporations) may also see their tax bills cut.
- The graduated “C-corporation” tax rates will range from 15% to 35% will be reduced to a flat 21% rate under the new law.
- The corporate AMT is fully repealed beginning in 2018.
- A new like-kind exchange rule limits exchanges to real estate not held primarily for sale.
- The IRC section 179 deduction will double to $1 million, subject to phase-out thresholds.
- Bonus depreciation will double to 100% and expand to include used property. The effective date is for assets acquired and placed in service after September 27, 2017 and before January 1, 2023.
- Pass-through entities (e.g., partnerships, s corporations, and sole proprietorships) will be entitled to a 20% qualified business income deduction. The provision is applicable for business owners with income under $157,500 ($315,000 for married filing jointly). In addition, the benefit is subject to phase-out.
Taxpayers should understand that a majority of these tax reform provisions are applicable only through 2025. We will continue to provide you with updates on the new changes in tax laws throughout the year. Please do not hesitate to contact our New York City tax firm in regard to any questions you may have about the Tax Cuts and Jobs Act.