HOWEVER…if you thought this time of year wasn’t already busy and interesting enough - the newly passed US Federal Tax Bill (12/20/2017) just made 2017 year-end (& 2018) tax planning a lot more interesting (and complex)!
The recent tax bill may be the most significant change to the tax system in our lifetimes. In some ways it simplifies your filings, but given the scale of the changes being made it creates a whole host of tax planning opportunities and changes going forward. I hope you have been able to read our separate “What The New Tax Bill Means For Your Business” blog post which outlines key changes in more detail.
To assist in your tax planning, below we have provided an updated list of potential tax planning considerations. The list isn’t exhaustive, but given that you only have a few days left in 2017, we encourage you to focus on important tax moves you need to make before year-end while time permits.
Don’t hesitate to reach out to us, or your tax advisor immediately to see what opportunities exist. Some of our clients have saved several thousand in taxes by acting fast in this rapidly evolving tax environment.
All said, after considering of the below Disclaimer*, I hope that the following summary helps provide you some actionable tax savings information:
Deferral of Income – As 2018 tax rates are generally expected to be lower than 2017, we generally recommend deferring as much income as possible to 2018 - regardless of the type of tax entity.
However, in certain cases, if you live in a high tax state (such as CA or NY) it may make sense to accelerate income - especially if your business is clearly a service-based business that likely won’t be eligible for the 20% pass-through deduction. The calculation isn’t straight forward, so it would be best to discuss with your tax advisor.
“Pass-through Entity” Income – The brand new “Pass-through” provision for personal service based businesses will add considerable complication, but will provide significant tax planning opportunities for owners of certain “Pass-through Entities” (e.g., S-Corps, LLC’s, and partnerships). As the status of this deduction isn’t yet clear for many business entities, we recommend you coordinate with your tax advisor re. the tax planning opportunities available for your business.
Income Deferral Opportunities May be Readily Available by:
Prepayment of Business Expenses – Prepay and incur business expenses to the extent possible and financially feasible.
Consider bonus payments, and/or funding retirement plans for employees and/or owners.
Capital Asset Purchases - Consider if any additions of capital assets (computers & electronics, autos, furniture, software, etc.) can be made and expensed before December 31:
Property Reg’s permit assets of less than $2,500 to be expensed immediately
Immediate expensing of assets may be allowed under the ‘Section 179’ or ‘bonus depreciation’ deductions.
Note: Some states don’t allow these accelerated deductions, so some state adjustments may be needed
Prepayment Entertainment Expenses – As the 50% deduction of entertainment expenses will be eliminated in 2018, it is recommended that you consider pre-paying for 2018 business entertainment expenses such as sports or theater tickets prior to year-end.
Asset & Investment Write-offs - Review your balance sheet to consider if it's possible to dispose of any worthless or impaired assets (inventory, accounts receivable, etc.)
Consider R&D Credit Opportunities - This credit has been expanded, and can be extremely valuable for companies to create new or improved functionality, performance, or quality of a business component.
International –As the US decreases its tax rates and changes its system of international taxation from one based on “Worldwide Income” to a “Territorial System”, there are significant tax planning opportunities.
***Remember, business sense should NOT be overridden by possible tax benefits!***
BUSINESS & PERSONAL:
Update All Employee’s W-4 Forms:
While the new tax rates will take effect Jan. 1, it will take some time for the IRS (and states) to update their tax forms and withholding tables. The payroll services will then need to update their withholding tables.
The best way to prepare is to plan to update all employees' Form W-4s (2018) when they are available from the IRS (or an equivalent version from your payroll service).
Here is the current DRAFT Form W-4 (2018)
Employees should not expect to see changes to their paycheck immediately. After the IRS has updated their tax tables, and employees have updated their W-4s, the amount withheld from an employee's payroll will change. This will likely be in February 2018. In addition, any catch-up amounts will be adjusted for automatically.
Deferral of Income – As for most businesses, 2018 tax rates are generally expected to be lower than 2017. As a result, we generally recommend deferring as much net income as possible to 2018.
Itemized Deductions - For many individuals and families, it will quite likely make sense to maximize 2017 itemized deductions (including ‘prepaying’ 2018 deductions where allowable) for 2 reasons:
Your 2018 income tax rates will likely be lower
You may ‘lose’ deductions deferred to 2018 for a variety of reasons including elimination or reduction of deductions, or you don’t end up itemizing due to an increased ‘Standard Deduction'
Note – While the above info will apply to many, there are numerous potential complexities and factors such as phaseouts and year-over-year changes that individuals will need to consider relative to their situation.
If you anticipate itemizing this year, consider making some of the following adjustments:
As the deduction of state & local taxes has largely been eliminated in 2018 (with some exceptions) Here are ways to take advantage of these deductions in 2017.
State & Local Income Taxes – Pay the full amount of state and local income taxes you owe for 2017. [Hint: If you are currently making quarter tax payments, make your planned Q4 estimated payment plus any additional state income tax payments you expect to owe on your 2017 return). BUT…don’t prepay for 2018 as these prepayments have specifically been excluded as potential deductions.
State & Local Property Taxes – Prepay your 2018 property taxes on your residence and 2ndhomes if you have already received an assessment (where your county allows). [Unless likely to be subject to Alternative Minimum Tax]
State & Local Sales Taxes – If you have utilized the sales tax deduction previously, or have made other high-priced purchases this year, consider making anticipated high-priced purchases in 2017.
Consider Prepaying Charitable Contributions - Prepayment reduces income and allows for deductions that may be lost due to the higher standard deduction in 2018.
This is especially applicable for gifts of appreciated stock
Mortgage Interest – pay your January mortgage payment by Dec. 31st to accelerate the payment of interest
As almost all are being eliminated in 2018, to the extent possible accelerate payments/purchases of planned expenses to meet 2% AGI floor (if not in AMT). These may include:
Tax preparation fees
Work-related education expenses
Other unreimbursed job expenses
Investment related expenses
Retirement/Health Accounts – As always, make timely retirement plan (401(k), IRA, etc.) & Health Savings Account (HSA) contributions
Due to lower marginal rates, consider a Roth IRA conversion in 2018
Note that the new tax bill prevents you from undoing this, so careful tax planning is important
Paying for Education – 529 savings plans will allow you to pay up to $10K in private school tuition from these accounts
If this is an educational goal for you, consider a balloon contribution early in your child’s life to really take advantage of the potential tax savings
Medical Deductions – Bunch medical deductions to exceed the new 10% AGI floor (effective 2019)
Payroll withholdings – Review your payroll withholdings in February of 2018, especially if you’re subject to the 0.9% Medicare surcharge on earned income
The IRS doesn’t anticipate having their withholding tables updated until at least February 2018, making it difficult to manage your tax withholdings before then
New dependent care credit – As an FYI there is a new $500 temporary credit for non-child dependents
This can apply to a number of people adults support, such as children over age 17, elderly parents or adult children with a disability.
May Your 2018 be Prosperous!