Are you sick of hearing about the Tax Reform Bill? Don't worry, we are sick of writing about it! We followed the bill from the initial one page plan that was released in April to the nine page "framework" released in October. We pored over the almost 500 page detailed report in November and the thousand plus pages of the Senate and House bills passed earlier this month. Now we finally have a final version of the bill passed by the Senate and the House and ready to be signed by the President! While a technicality might prevent him from signing until January, we know this bill will be signed into law and be effective for the 2018 tax year.
There weren't any major surprises in the final version of the bill for individuals, so the year-end tax planning recommendations we've already discussed are still applicable (except the FIFO rule, which was left out of the final version). But now we are down to the wire and are just over a week away from a sweeping overhaul of our tax system. We know you are wondering how it will impact you and what you can do before the end of the year to prepare. Unfortunately, despite promises to simplify the tax system, assessing the impacts of the bill will be anything but simple. Until we get our tax software updated with the final provisions of the bill, we won't be able to accurately assess the exact impact on each of you in 2018 and beyond.
What we do know is that many individuals will see a small to moderate tax reduction starting in 2018, but some high income taxpayers in states with the highest income tax rates could actually see a tax increase. Corporations will see the biggest tax cut with a drop from a 35% to a 21% rate, while many pass-through businesses will also benefit from a lower tax rate.
Even though we won't be able to assess the exact impact on each of you before December 31, there are some things you should consider doing before year end, if you haven't already:
- If you have a 4th quarter state tax estimate due, or think you might owe additional state income taxes on your 2017 return, you should probably make that payment before 12/31, unless you think you might owe Alternative Minimum Tax (AMT) this year. Under the AMT calculation you are not allowed to deduct state income taxes, which limits the federal benefit of your state income tax deduction. The tax reform bill will cap your state income and real estate tax deduction at $10k starting in 2018. Wondering if you'll owe AMT this year? Aside from running a 2017 tax projection, the easiest way to tell is to look at your 2016 1040, page 2, line 45. If this isn't zero, you owed AMT in 2016 and if your income/deductions are similar in 2017, you'll likely be in AMT again. There are some situations where, even if you are in AMT, you could receive a slight benefit from paying state income taxes this year, but that's an exception rather than the rule. NOTE: You cannot prepay your 2018 state income taxes in 2017!
- If you have a bill for your 2018 real estate taxes, you can prepay those before year end and deduct them in 2017 so you should do so if you have the cash flow available. As with state income taxes, the benefit from paying real estate taxes will be reduced or eliminated if you are in AMT.
- Consider accelerating any charitable contributions into this year. Unless your itemized deductions exceed the new $24k standard deduction in 2018 ($12k for singles), you will not benefit from making charitable donations. A simple way to look at this is to take your 2016 Schedule A and add up line 4, line 9 (limited to $10k), line 15 (subject to reductions based on new mortgage interest limitations), and line 19. Is that number higher than $24k? If so, then you'd still itemize in 2018 and benefit from charitable donations. Otherwise, consider donating more this year or possibly even contributing appreciated stock to a donor advised fund, although we are running out of time for this option.
- Fund your 529 plans before year end. These have become more valuable under the new tax bill because they can now be used for private elementary and high school in addition to college. If you are a Maryland resident we suggest contributing at least $2,500 per child per parent or grandparent to maximize the current year state tax deduction.
- Defer income if possible. Unless you are in the top tax bracket and live in a high tax state, you'll likely pay a lower tax rate on your income next year and should therefore defer income where possible. For higher income taxpayers the benefit of the state tax deduction this year might be better than the reduced tax rates next year.
- Re-evaluate your estate planning. The estate tax exemption is set to double under the bill to over $11 million per person, although this doubling will expire in 10 years. In 2018 you should review your estate plan to make sure it is in line with your wishes and if any changes need to be made as a result of this increased exemption.
With the holidays around the corner and time running out before the end of the year, it's important to think through each of these aspects of the reform bill and how they might impact you. As we spend more time thinking about the broader tax and financial planning implications of this bill, we will be in touch with further planning thoughts and strategies.
-Chris Benson, CPA/PFS
The views expressed represent the opinions of L.K. Benson & Company and are subject to change. These views are not intended as a forecast, a guarantee of future results, investment recommendation, or an offer to buy or sell any securities. The information provided is of a general nature and should not be construed as investment advice or to provide any investment, tax, financial or legal advice or service to any person.
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