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             Year-End Tax Planning Prior to Passage of the Tax Cuts & Jobs Act

 

Dear Client:

The Senate and House have been busy re-shaping the manner in which we will be taxed for federal tax purposes.  Although the House Bill is much more comprehensive than the Senate proposal, the two branches of government share several commonalities.

 

This letter is intended to address proposed changes common to both versions of the legislation and inform you what actions are possible to reduce your 2017 federal income taxes by deducting certain 2018 expenses in 2017 and pushing income into 2018 when the federal marginal rates are expected to be lower.

As for state conformity, California will not have sufficient time to react to the Tax Cuts and Jobs Act.   Therefore, California will continue to follow the Internal Revenue Code as of January 1, 2015.  Simply stated, if you are a California taxpayer the changes detailed herein will not apply to your 2018 California income tax return.  Other states that religiously adopt the Internal Revenue Code without hesitation (Arizona, Hawaii and Oregon) will probably adopt the Tax Cuts and Jobs Act effective January 1, 2018.

 

Commonalities between the House and Senate Bills.

                Income and Loss Related Changes.

A.            Nonbusiness Casualty and Theft Losses.  The deduction for a loss incurred as a result of fire, flood, or theft that is not covered by insurance is no longer deductible.  Under the House bill a casualty incurred as a result of a hurricane remains deductible.

B.            Sale of Residence Exclusion.  Under current law, $ 250,000 ($ 500,000 joint taxpayers) of the gain on the sale of your personal residence is tax-free if you lived in the home for 2 of the last 5 years.  Both bills seek to change the holding period to 5 of the last 8 years. 

C.            Moving Expenses.  The deduction related to an employment-related move is repealed for 2018.  The few of you that have recently sold your home and have not moved are encouraged to move the bulk of your household belongings before January 1, 2018 to preserve this deduction.

 

                Standard Deduction.

A.            Substantial Increase in Standard Deduction Amounts.  The chart below details the proposed increase in the standard deduction from the 2017 levels. 

                                               2017 Standard Deduction             2018 Standard Deduction

                Single                                    $   6,350                                                $ 12,000

                Head of Household         $   9,350                                                $ 18,000

                Married – Joint                  $ 12,700                                               $ 24,000

2017 Tax-Planning Tip.   The increased levels in the standard deduction will eliminate the tax benefit of itemizing deductions for several of you.  In an effort to preserve the deduction and lower your 2017 federal income tax liability consider the following: 

Pay the following taxes prior to December 31, 2017:

1.            Real Property Taxes, normally due April 10, 2018.

2.            State Estimated Taxes, normally due January 15, 2018.

Other considerations:

1.            Charitable Giving.  Accelerate January tithings and non-cash donations into December.

2.            Unreimbursed Employee Business Expenses.  Purchase supplies and equipment before year-end.  

 

                Itemized Deductions.

A.            Elimination of the State and Local Tax Deduction (SALT).  Both pieces of legislation eliminate the deduction for state and local income taxes, and the alternative deduction of sales taxes paid.

Comments.  The elimination of the deduction for state and local income taxes will not have the dramatic affect as communicated in the press.  Currently, Alternative Minimum Tax reduces and often eliminates any and all benefits of the SALT deduction.  It is more of a physiological deduction we personally use to justify the high state income taxes that we currently pay.  Additionally, the elimination of SALT does not apply to taxes paid incident to any trade or business (rentals, self-employed persons, pass-throughs, etc.).

2017 Tax-Planning Tip.   In an effort to preserve the deduction and lower your 2017 tax liability consider the following: 

 

Pay the following taxes prior to December 31, 2017:

1.            4th Quarter State Estimated Taxes.

2.            Planned large taxable purchases (vehicles, recreational vehicles, boats, etc.) should be made before year-end.

 

 B.            Personal Residence Mortgage Interest.  There is a substantial amount of disagreement with respect to home mortgage interest deductibility between the House and Senate.  The House proposal has an effective date of November 2, 2017 which means that purchase debt and/or refinance debt after November 2, 2017 would fall under the new law.

Comments.  Under the current law all persons are allowed to deduct the interest attributable to the acquisition and improvement of your home plus $ 100,000 of equity debt (second trust deed).  Because of the dramatic increase in property values, the government has attempted to monitor any increase in mortgage debt amounts by requiring lenders to report mortgage balances annually on Form 1098; conducting “tracing” audits and mortgage debt audits.

2018 Tax-Planning Tip.   Consider waiting to refinance your home until this area has been clarified.  I expect that “grandfathered debt” (pre-November 2, 2017 mortgages) provisions will be written into law. 

 

C.            Elimination of Tax Preparation Fees.  The deduction for tax preparation not attributable to a trade or business (rentals, self-employment, pass-through, etc.) will be repealed for tax years beginning after 2017.

Comments.  The majority of you operate a trade or business, where the bulk of this deduction is reflected therefore, the repeal will not affect you.

 

D.            Miscellaneous Itemized Deductions.  The deductions for “unreimbursed” employee business expenses, investment expenses, union dues and certain legal fees have been eliminated.  The elimination of this deduction will have a substantial impact on healthcare workers, first-responders, outside salespersons, truckers and persons having multiple employers.

 

2017 Tax-Planning Tip.   In an effort to preserve the deductions and lower your 2017 tax liability consider the following: 

Pre-pay any recurring or anticipated unreimbursed employee business expenses prior to December 31, 2017:

1.            Automobile Lease Payment (January only, applicable to outside salespersons and others who regularly use their car for business purposes).

2.            Continuing Education.

3.            Equipment (cellular and computer equipment).

4.            Firehouse Dues (January only).

5.            Liability Insurance (educators and healthcare workers).

6.            Office-in-Home Expenses (January utility bills, repairs and furnishings).

7.            Professional Licenses.

8.            Professional Memberships.

9.            Professional Subscriptions.

10.          Supplies (toner, postage, paper, etc.).

 

E.            Gambling Losses.  The deduction for gambling losses to the extent of wagering income remains intact.  The Senate bill expands the deduction to include the costs attributable to wagering (Daily Racing Form, Racing Digest, tournament fees, etc.).

 

F.            Pease Limitation – Repealed.  Under current federal and state law high income taxpayers are denied the ability to deduct a portion of their itemized deductions, both the House and Senate have repealed this phase-out for federal tax purposes.

 

Personal Exemptions - Repealed.

 

Explanation. Under current law each taxpayer is allowed to deduct $ 4,050 for each exemption (him or herself, spouse and dependents) listed on the return.  Over the past few years this deduction has been the subject of increased audit attention (persons claiming questionable and/or non-verifiable dependency exemptions).  Both the House and Senate Bills repeal this deduction for simplification purposes and replace the dependency exemption with an expansion of the Child Tax Credit and introduce a Family Tax Credit for persons older than 17 years of age.  In order to take advantage of these credits all persons must have a valid Social Security Number, ITINs no longer qualify. 

 

Marginal Tax Rates.

 

Reduction in Marginal Tax Rates.  Although the House and Senate remain in disagreement, the marginal tax rates are expected to decline in 2018.

2017 Tax-Planning Tip.   If possible, defer recognizing income in 2017 to 2018 to take advantage of the anticipated lower 2018 marginal tax rates.

 

Tax Credits - Expanded.

Child Tax Credit.  Both the Senate and House versions contain provisions for an increase in the Child Tax Credit.   Presently, the credit is phased-out when your adjusted gross income exceeds $ 110,000.  Under the proposed law the credit will phase-out when a married couple’s adjusted gross income exceeds $ 500,000.

 

Tax Credits - Repealed.

Plug-in Vehicle.  The government has provided a maximum credit of $ 7,500 for the purchase of a plug-in vehicle used for personal purposes.  This credit is no longer available for 2018 income tax returns.

2017 Tax-Planning Tip.   If you were considering purchasing a Tesla or other qualifying vehicle in 2018, you should consider purchasing the car before year-end.