In the early morning hours of Saturday, December 2, the Senate passed a tax reform bill that would bring sweeping changes to our income tax system for individuals and corporations. The House of Representatives had already passed a similar bill earlier in November, and now the reconciliation process has begun. While significant differences between the two bills remain (see here for a good summary), there are enough similarities that we believe the odds are high that a compromised version of the bill will be signed into law before the end of the year. Unfortunately, you won't have much time after the bill is passed to determine exactly how it will impact your own situation and implement any tax planning strategies before year end. However, we do think there are some things everyone should be thinking about doing right now:
- Accelerate Deductions - Both bills feature a full repeal of the state and local income tax deduction along with other potential cuts or limitations on the deductibility of medical expenses, real estate taxes and mortgage interest. Both bills offset the limitation on deductions with a higher standard deduction, which means fewer people will benefit from some of these expenses in the form of an itemized deduction on future tax returns. If you are able to pay any of these bills before year end, such as your real estate tax bill or your 4th quarter state tax estimates, you should consider doing that.
- Defer Income - The proposed tax rate structures are different (see this comparison) and your income level will determine what impact the new rates will have on you. However, many people will see lower ordinary income tax rates beginning in 2018 so if you are able to defer any income you otherwise would receive in December to January, this could benefit you from a tax standpoint. We should note that some individuals in high tax states might benefit from accelerating income into this year because of the loss of the state tax deduction so everyone's situation will be different.
- FIFO Cost Basis Planning - This one is a tricky and undercovered aspect of the tax reform bills that would have an impact on tax planning for many individuals, but particularly those who hold concentrated stock positions. Lyle has more detail on this aspect of the bill and some planning strategies to consider before year-end.
- Contribute to a Donor Advised Fund - If you are charitably inclined, and facing the potential that you won't benefit from future charitable contributions on your tax return, you might consider opening a Donor Advised Fund and contributing appreciated securities before year end. This allows you to maximize your tax deduction this year, then spread out the actual donations to the charities you choose in future years. More information on this can be found here, or we'd be happy to help you think through this.
- Evaluate Your Business Entity Structure - Both bills include a reduced tax rate for many pass-through businesses, but there are significant differences between the two bills. Personal services companies are generally not eligible for the preferential rates and each bill has some provisions in place to prevent the shifting of wage income to pass-through income. Changing your business structure will only make sense in certain situations and it would not need to be done before year end, but if you are a business owner it should be something you watch closely as the bills move forward.
We will continue to monitor the developments and keep you posted of any substantive changes to the bill. If you have any questions about how it might impact you, feel free to contact us to discuss.
-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.
Please see Additional Disclosures more information.