The Tax Cuts and Jobs Act (TCJA) has passed Congress and is expected go into effect in 2018. This lengthy new law contains an array of changes that will impact both individual and business taxpayers. Depending on your personal financial situation, some aspects of the new 2018 tax law may not be as advantageous as the current law, indicating you should take quick action with financial moves before December 31st.
There are also aspects of the new rules that work in the other direction – you could see a tax advantage by deferring some actions to have them hit in 2018 rather than 2017.
If you have specific questions about the tips below, or other aspects of the new tax law, please reach out to your Frazier & Deeter tax advisor.
What to do Now: Pre-Pay Items that Will No Longer be Deductible, or Will Be Capped, in 2018
State and Local Income, Sales, and Real Estate Taxes. Under the new law, certain deductions will either cease to exist or will be capped. For individuals, state and local income taxes as well as property taxes fall into this category. Under the new tax law, there will be a deduction limit of $10,000 for the combination of all state and local taxes including income taxes, sales taxes and real estate taxes. Depending on the amount of your state, local and property taxes owed for 2017, prepaying them before year end could result in substantial savings.
It’s important to understand that this only applies to prepayment of 2017 state tax, not 2018. Note that Congress added a provision in the final version of the bill that prevents individuals from prepaying their 2018 state income taxes this year in order to deduct them on their 2017 federal returns.
Miscellaneous Deductions. A number of itemized deductions will be eliminated in 2018. Many of these are deductible in 2017 if they exceed two percent of adjusted gross income. These eliminated itemized deductions include miscellaneous professional service fees, employee business expenses and entertainment expenses. Where possible, make payments in 2017 toward future expenses of this nature.
Business Entertainment Expenses. Currently 50 percent of business entertainment expenses are tax deductible, but under the new law none of these expenses will be deductible. If you have been planning to take a client or a prospect out for a fabulous meal, you may want to do it by New Year’s Eve.
Contributions to Colleges Related to Sporting Event Tickets. Many colleges require a donation to enable the purchase of tickets to sporting events. These donations are currently deductible at 80 percent, but this deduction has been eliminated, so if you make an annual donation tied to college athletics tickets, you have a compelling reason to make that donation before year end.
Other Charitable Contributions. Since the TCJA doubles the standard deduction, many taxpayers will no longer benefit from itemizing. If you fall into this group of taxpayers, the tax benefits of charitable contributions are greater in 2017 than they will be in 2018. Consider increasing your donations this month to take advantage of the current tax benefit, or using a donor-advised fund. A donor-advised fund grants an immediate tax break for the full donation once a charitable contribution is made.
Businesses with Net Operating Losses (NOLs). Under the current law, businesses with NOLs can offset taxes by carrying the losses back two years and forward 20 years. Under the new law, the opportunity to carry the losses back will be gone, so if the opportunity to carry back a loss to 2015 or 2016 is significant to your business, it would be wise to maximize 2017 losses versus having them hit in 2018.
Actions You Should Defer Until 2018
Deferring income. Deferring your personal or business income until 2018 will subject that income to the lower TCJA tax brackets. For those who expect to stay at the same income level in 2018 and are self-employed, commission-based or small business owners, this deferral of income may be particularly helpful. If you run a business that renders services and operates on a cash basis, holding off on billings until January could result in a lower tax bill.
Taxable gifts. Under the new law, the amount of estate assets and gifts shielded from taxation will double, so if you are planning to make a gift that would incur taxes under the current tax code, please wait a few weeks and give that gift in 2018.
These are the most time-sensitive tax planning activities that impact many taxpayers, but your personal situation may present other opportunities. Stay tuned for more analysis of the implications of the new tax law from Frazier & Deeter in the new year. As always, please feel free to call your tax advisor to discuss your unique situation.