Dear Client:
Congress appears poised to enact a
major tax reform law that could potentially make fundamental changes in the way
you and your family calculate your federal income tax bill, and the amount of federal
tax you will pay. This letter is designed to help you cope with the changes
Congress is hammering into shape right now—to take advantage of tax breaks that
may be heading your way, and to soften the impact of any crackdowns. Keep in
mind, however, that while most experts expect a major tax law to be enacted
this year, it's by no means a sure bet. So keep a close eye on the news and
don't swing into action until the ink is dry on the President's signature of
the tax reform bill.
Lower tax rates coming. Both the tax
bill passed the House of Representatives and the one before the Senate would
reduce tax rates for many taxpayers, effective for the 2018 tax year.
Additionally, businesses may see their tax bills cut, although the final form
of the relief isn't clear right now.
The general plan of action to take
advantage of lower tax rates next year would be to defer income into next year.
Some possibilities follow:
- . . . If you are an employee who believes a bonus is
coming your way before year end, consider asking your employer to delay
payment of the bonus until next year.
- . . . If you are thinking of converting a regular IRA
to a Roth IRA, postpone your move until next year. That way you'll defer
income from the conversion until next year and hopefully have it taxed at
lower rates.
- . . . If you run a business that renders services and
operates on the cash basis, the income you earn isn't taxed until your
clients or patients pay. So if you hold off on billings until next year—or
until so late in the year that no payment can be received this year—you
will succeed in deferring income until next year.
- . . . If your business is on the accrual basis,
deferral of income till next year is difficult but not impossible. For
example, you might, with due regard to business considerations, be able to
postpone completion of a job until 2018, or defer deliveries of
merchandise until next year. Taking one or more of these steps would
postpone your right to payment, and the income from the job or the
merchandise, until next year. Keep in mind that the rules in this area are
complex and may require a tax professional's input.
- . . . The reduction or cancellation of debt generally
results in taxable income to the debtor. So if you are planning to make a
deal with creditors involving debt reduction, consider postponing action
until January to defer any debt cancellation income into 2018.
Disappearing deductions, larger
standard deduction. Beginning next year, both the House-passed tax reform bill
and the version before the Senate would repeal or reduce many popular tax
deductions in exchange for a larger standard deduction. Here's what you can do
about this right now:
- The House-passed tax reform bill would eliminate the
deduction for nonbusiness state and local income or sales tax, but would
allow an up-to-$10,000 deduction for real estate taxes on your home. The
bill before the Senate would ban all nonbusiness deductions for state and
local income, sales tax, and real estate tax. If you are an employee who
expects to owe state and local income taxes when you file your return next
year, consider asking your employer to increase withholding on those
taxes. That way, additional amounts of state and local taxes withheld
before the end of the year will be deductible in 2017. Similarly, pay the
last installment of estimated state and local taxes for 2017 by Dec. 31
rather than on the 2018 due date, or prepay real estate taxes on your
home.
- Neither the House-passed bill nor the bill before the
Senate would repeal the itemized deduction for charitable contributions.
But because most other itemized deductions would be eliminated in exchange
for a larger standard deduction (e.g., in both bills, $24,000 for joint
filers), charitable contributions after 2017 may not yield a tax benefit
for many. If you think you will fall in this category, consider
accelerating some charitable giving into 2017.
- The House-passed bill, but not the one before the Senate,
would eliminate the itemized deduction for medical expenses. If this
deduction is indeed chopped in the final tax bill, and you are able to
claim medical expenses as an itemized deduction this year, consider
accelerating “discretionary” medical expenses into this year. For example,
order and pay for new glasses, arrange to take care of needed dental work,
or install a stair lift for a disabled person before the end of the year.
Other year-end strategies. Here are
some other “last minute” moves that could wind up saving tax dollars in the
event tax reform is passed:
- The exercise of an incentive stock option (ISO) can
result in AMT complications. But both the Senate and House versions of the
tax reform bill call for the AMT to be repealed next year. So if you hold
any ISOs, it may be wise to hold off exercising them until next year.
- If you've got your eye on a plug-in electric vehicle,
buying one before year-end could yield you an up-to-$7,500 discount in the
form of a tax credit. The House-passed bill, but not the one before the
Senate, would eliminate this credit after 2017.
- If you're in the process of selling your principal
residence and you wrap up the sale before year end, up to $250,000 of your
profit ($500,000 for certain joint filers) will be tax-free if you owned
and used the property as your main home for at least two of the five years
before the sale. However, under the House-passed bill and the bill before
the Senate, the $250,000/$500,000 tax free amounts would apply to
post-2017 sales only if you own and use the property as your main home for
five out of the previous eight years.
- Under current rules, alimony payments generally are an
above-the line deduction for the payor and included in the income of the
payee. Under the House-passed tax bill but not the version before the
Senate, alimony payments would not be deductible by the payor or
includible in the income of the payee, generally effective for any divorce
decree or separation agreement executed after 2017. So if you're in the
middle of a divorce or separation agreement, and you'll wind up on the
paying end, it would be worth your while to wrap things up before year end
if the House-passed bill carries the day. On the other hand, if you'll
wind up on the receiving end, it would be worth your while to wrap things
up next year.
- Both the House-passed bill and the version before the
Senate would repeal the deduction for moving expenses after 2017 (except
for certain members of the Armed Forces), so if you're about to embark on
a job-related move, try to incur your deductible moving expenses before
year-end.
Please keep in mind that I've
described only some of the year-end moves that should be considered in light of
the tax reform package currently before Congress—which, it bears emphasizing,
may or may not actually become law. If you would like more details about any
aspect of how the proposed legislation may affect you, please do not hesitate
to call.
Very truly yours,
Shawn
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