Author: Russell C. Lindsay, CPA
December 13, 2017

Have you heard that tax change and reform is coming?  The current proposed changes to the tax code could be the most extensive since Reagan’s Tax Reform Act of 1986.  But you might need to act quick to get in last minute moves before year-end, as most of the changes will take place next year in 2018.  So, you might ask yourself, how can I strategize before year-end to make some smart moves and prepare?

 While the House and the Senate version of the bill must go through the reconciliation process to mend the differences, it is safe to say there should be tax changes put into law next year.  Most Americans are likely to see a small reduction in taxes beginning in 2018, but some may see a small increase.  So, in analyzing some of the anticipated changes below, you may want to consider some of these actions steps before year-end:

What you should do before 12/31/17:

  • Tax Bracket Planning – what will your bracket be in 2017?  Will it be higher or lower in 2018 and beyond?  You will want to start here.  By understanding your tax rate structure for 2017 and 2018 then you’ll know how to plan.  Obviously, the goal is the pay the lowest tax possible.
  • Tax rate will be higher in 2017 – You’ll want to accelerate expenses into 2017.  You can claim a deduction for all items paid before 12/31/17 if the check is dated 12/31/17 or charged to a credit card before year-end.  Do you have any expenditures you know you will pay for in January, February or March of 2018?  You should consider accelerating these expenses and paying for them before 12/31/17.  You’ll also want to delay income to 2018.  A lot of businesses have reduced work schedules and hours during the holidays.  Perhaps this means you can delay taking payment and income until 2018.  If you can delay deposit of income into January 2018 then you won’t have to pay tax until next year, hopefully at a lower rate!
  • Tax rate will be lower in 2017 – You’ll want to accelerate income in 2017.  Do you have customers who owe you money?  You’ll want to encourage payment and deposit the income in 2017.  You’ll also want to delay expenses to 2018.  Contact your vendors and ask if they will accept payment in early 2018 to push the deduction into the next year.

Some of the proposed and expected changes in the tax reform bill include:

Change for Individuals

  • Fewer Tax Brackets (or the same) – currently we have 7 brackets.  These brackets may stay at 7, but may also shrink down to as few as 4 brackets.  (See the end of this article for the current and proposed tax rates).
  • Tax Rate Reduction – in both scenarios, most of the brackets are being reduced a few % points.
  • Personal Exemption Deduction Eliminated – in 2017, there is a $4,050 personal exemption deduction for each person claimed on a return.  Both bills suggest this deduction will be eliminated.
  • Increase in the Standard Deduction – the current standard deductions will likely double, meaning fewer filers will benefit from itemizing their deductions.
  • Removal of 2nd Home Interest Deduction – currently a deduction is allowed for mortgage interest on a 1st and 2nd residence.  The deduction for the 2nd residence likely will be removed.
  • Mortgage interest deduction only allowed on 1st $500,000 of mortgage debt
  • Elimination of the deduction for State and Local taxes paid
  • Increase in Child Tax Credit
  • Adoption credit to be repealed
  • 529 plans will be able to be used for private school
  • Increase in the Estate Tax Exemption

Change for Businesses

  • Expensing of Asset Purchases – businesses will be able to immediately expense the cost of assets at a significantly higher limit than in the past.
  • Income tax rates for pass-through entities – both bills propose either a lower rate of 25% on pass-through income or a deduction of 23% on pass-through income before applying a tax bracket.  These changes do not apply to personal service businesses.
  • Income Tax Rates for C Corporations – lowering the C Corporation rate to 20%.  Will C Corp’s come back in vogue?
  • Elimination of the Domestic Production Deduction

 

The Winning Strategy

Failure to plan is an option, but in this case, it may not be a good one.  Broad-based changes in the tax law don’t happen all too often.  So, when they do, it is important to be well-versed on the changes so you can ensure you take advantage.  More than likely you’ll be in a lower tax bracket in the future.  Meet with your CPA or trusted advisor to discuss what your plans are for the future and how you can best minimize your taxes.  Good luck with your planning!

 

 


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