2017 Tax Reform: Last-minute year-end moves

The biggest tax law change since 1986 is now a done deal. We will certainly be telling you a great deal more about its revolutionary tax changes in the weeks to come. But the purpose of this newsletter is to discuss actions to take before the end of 2017 to take advantage of the best parts of both the old and new tax law regimes.

Expiring Deductions. Beginning next year, the new law suspends or reduces many deductions. Here’s what you can do now:

  • Individuals (as opposed to businesses) will only be able to claim an itemized deduction of up to $10,000 ($5,000 for a married taxpayer filing a separate return) for the total of (1) state and local property taxes; and (2) state and local income taxes. To avoid this limitation, pay the last installment of estimated state and local taxes for 2017 no later than Dec. 31, 2017, rather than on the 2018 due date. But don’t prepay your 2018 state income taxes. Congress says such a prepayment won’t be deductible in 2017.
  • The new tax law’s prohibition on prepaying state income taxes doesn’t apply to property taxes. If your local property tax authority is accepting 2018 tax payments in 2017, you can prepay those taxes and take a deduction in 2017. As of now, DC and at least some jurisdictions in Virginia are accepting early 2018 property tax payments. In Maryland, Montgomery County is NOT accepting early payments for 2018.
  • Miscellaneous itemized deductions will no longer be allowed in 2018. If you’ve historically benefitted from deducting unreimbursed employee business expenses, investment advisory fees, tax return preparation fees, and other similar expenses, you may benefit by paying these amounts now rather than next year.
  • Keep in mind that the alternative minimum tax severely limits the federal tax benefits of some of the above deductions for some taxpayers. Even if you’re in AMT, though, you may get a benefit on your state income taxes for property taxes and miscellaneous itemized deductions in 2017, and that benefit likely won’t be available in 2018.
  • Because of the increase in the standard deduction ($24K for a married couple filing a joint return) and the severe restrictions in other itemized deductions, some taxpayers (particularly those who no longer pay mortgage interest) who have traditionally itemized deductions may claim the standard deduction starting in 2018. If you’re in that situation, you could benefit by accelerating other deductions (e.g., charitable contributions) that aren’t limited under the new law. Those deductions won’t do you any good in a year where you’re claiming the standard deduction, but they’re still valuable in 2017.

Lower tax rates coming. The new law reduces tax rates for many taxpayers (especially those who derive a substantial portion of their income from pass-through entities), effective for the 2018 tax year. For years, accountants have encouraged clients to defer income “until next year,” and that advice is even more important when the rates next year will be lower. Some ideas:

  • If you are about to convert 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 have it taxed at lower rates.
  • Earlier this year, you may have already converted a regular IRA to a Roth IRA but now you question the wisdom of that move, as the tax on the conversion will be subject to a lower tax rate next year. You can unwind the conversion to the Roth IRA by doing a recharacterization-making a trustee-to-trustee transfer from the Roth to a regular IRA. This way, the original conversion to a Roth IRA will be cancelled out. But you must complete the recharacterization before year-end. Starting next year, you won’t be able to use a recharacterization to unwind a regular-IRA-to-Roth-IRA conversion.
  • 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 will likely be received this year-you will likely succeed in deferring income until next year.
  • 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.

Other year-end strategies. Here are some other last minute moves that can save tax dollars in view of the new tax law:

  • 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 new law, alimony payments aren’t 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. 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.
  • Like-kind exchanges are a popular way to avoid current tax on the appreciation of an asset, but after Dec. 31, 2017, such swaps will be possible only if they involve real property. So if you are considering a like-kind swap of other types of property, do so before year-end. The new law says the old, far more liberal like-kind exchange rules will continue apply to exchanges of personal property if you either dispose of the relinquished property or acquire the replacement property on or before Dec. 31, 2017.
  • For decades, businesses have been able to deduct 50% of the cost of entertainment directly related to or associated with the active conduct of a business, provided strict substantiation requirements are met. But under the new law, for amounts paid or incurred after Dec. 31, 2017, there’s no deduction for such expenses. So if you’ve been thinking of entertaining clients and business associates, do so before year-end.
  • The new law suspends the deduction for moving expenses after 2017 (except for certain members of the Armed Forces), and also suspends the tax-free reimbursement of employment-related moving expenses. So if you’re in the midst of a job-related move, try to incur your deductible moving expenses before year-end, or if the move is connected with a new job and you’re getting reimbursed by your new employer, press for a reimbursement to be made to you before year-end.

Please keep in mind that we’ve described only some of the year-end moves that should be considered in light of the new tax law. Also, there are a host of other provisions that will require action next year. If you would like more details about any aspect of how the new law may affect you, please do not hesitate to call.