2017 Year-End Tax Planning: Personal Tax Consideration and New Legislation

robert w. hoffman

The Tax Cuts and Jobs Act of 2017 has key changes that will have a major impact on your future tax returns and planning going forward. Below we have listed some of the more substantial changes, compared other notable areas to the current law and provided some year-end tax planning recommendations.

Individual Tax Changes:

Personal Exemptions and Standard Deduction.  The bill eliminates the deductions for personal exemptions and also nearly doubles the standard deduction. The current personal exemption for 2017 is $4,050 (and begins to phase out at AGIs of $261,500 for single taxpayers and $313,800 for married taxpayers). The current standard deduction is $6,350 ($12,700 for married taxpayers) for 2017. The compromise bill proposes increasing the standard deduction to $12,000 for single taxpayers and $24,000 for married taxpayers.

State and Local Tax Deductions. The deductions for property, and state income or sales tax, which are currently fully deductible, are eliminated under the bill and are limited to a collective cap of $10,000.

Itemized Deductions. Both plans eliminate the Pease limitation, which limits the amount of itemized deductions certain higher income individuals can take, which will benefit many taxpayers.

Medical Deductions. A short-term reduction to the medical expense deduction threshold reduces the current 10% of expenses above AGI down to 7.5% for the next two years.

2018 Tax Rates:

 

Rate Joint Return Individual Return
10% $0 – $19,050 $0 – $9,525
12% $19,050 – $77,400 $9,525 – $38,700
22% $77,400 – $165,000 $38,700 – $82,500
24% $165,000 – $315,000 $82,500 – $157,500
32% $315,000 – $400,000 $157,500 – $200,00
35% $400,000 – $600,000 $200,000 – $500,000
37% Over $600,000 Over $500,000

Business Tax Changes:

Carried Interest. Individuals that earn partnership interest for performing services have historically received long-term capital gain treatment when they ultimately sell that interest. The bill would impose a three-year holding period of that partnership interest, instead of the current one-year holding period, before individuals could receive the benefit of the long-term capital gain tax rates.

Pass-Through Businesses. Currently, owners of partnerships, S corporations, and sole proprietors that have “pass through” income pay tax on that income at their personal income tax rates. The bill would continue taxing that income at personal income tax rates but would allow for a 20% deduction on their income (similar to how self-employed tax is currently handled). However, the 20% deduction would be prohibited for anyone in certain service businesses unless their taxable income is less than $315,000 if married ($157,500 if single). There are other proposed limitations on pass-through businesses and we will distribute that information as it becomes available.

Corporations. The Federal Corporate tax rate is currently 35% and the proposed compromise would enact an immediate AND permanent rate reduction to 21%.

Year-End Recommendations:

Saving Money and Situational Strategy

Our normal year end advice about accelerating deductions and deferring income has increased importance in 2017. As the tax rates will be lower in 2018, consideration should be given to deferring income into next year where possible. It seems clear that state and local, as well as, real estate tax deductions will be decreased in 2018 with the new law. Consider making 2017 Georgia resident income tax payments by the end of the year. This may be beneficial even if you are subject to AMT, as Georgia residents will get a 6% benefit for tax paid in 2017 that they may lose if the payment is made in 2018. Additionally, if you expect to be in a lower tax bracket it may be worthwhile to consider a Roth conversion. See below for additional annual reminders.

General Annual Maintenance

Harvest Gains and Losses – As usual, we recommend harvesting losses (in non-retirement accounts) to offset any gains. And harvesting gains if it is likely you will have low or possibly negative taxable income consequently incurring little or no tax on your gains.

Gifts – Remember to make your annual exclusion gifts.

Required Minimum Distributions (RMD) – There is a December 31st deadline for those that are over the age of 70 ½ or have inherited an IRA to take a minimum distribution. Please note that there is a penalty for failing to take a RMD.

Retirement Plans – Remember to make your contribution to employer sponsored retirement plans BEFORE the end of the year. IRA and SEP contributions can be made up UNTIL April 17, 2018.

Education Expenses – DO NOT forget reimbursements from 529 plans for 2017 tuition expenses. The reimbursement MUST be paid in the year the expense was incurred.

Other Notable Areas Where the New Bill and the Current Tax Code Differ:

 

INDIVIDUAL
TAX AREA
CURRENT LAW COMPROMISED BILL PROPOSAL
Individual Tax Rates Seven tax brackets: 10%, 15%, 25%, 28%, 33%, 35%, & 39.6% Seven tax brackets: 10%, 12%, 22%, 24%, 32%, 35% & 37%
Individual Alternative Minimum Tax (AMT) Exemptions phaseout at $70,300 for individuals and $109,400 for married taxpayers filing joint tax returns Raises exemptions to $500,000 for individuals and $1,000,000 for married taxpayers filing joint tax returns
Child Tax Credit $1,000 Per Child $2,000 Per Child
Affordable Care Act (ACA) Individual Mandate 3.8% Net Investment Income Tax, individual mandate tax penalty and .9% Payroll Tax Repeals Individual Mandate tax penalty
Mortgage Interest Deduction The cap for the current mortgage interest deduction is $1 million Keeps current mortgage interest deduction but caps the deduction at $750,000 for new loans.
Estate Tax 40% tax on assets over $5.49 million per individual for 2017 Doubles the $5.6M estate tax exemption to $11.2 Million ($22.4 per married couple)

Conclusion:

Taxes are complex and every taxpayer has their own unique financial identity. You should always be reviewing tax strategies but it is important to remember that every tax tip you get or article you read may not apply to your personal situation. Because of that we are here to help you with any concerns you have or questions you may need answered.  Please contact us at 404-255-7400 or info@hoffmanestatelaw.com with questions or concerns about this bill.

2013 Year-End Tax Planning: Personal Tax Considerations

As January 1, 2014 gets closer, year-end tax planning considerations should be starting to take shape. New tax legislation has brought greater certainty to year-end planning, but has also created new challenges. The number of changes made to the Tax Code and the opportunities these changes bring may seem overwhelming. However, early planning will help you to maximize your potential tax savings and minimize your tax liability. This letter is intended to be a mile-high view of some key year-end tax planning strategies.

Changes for 2013 and beyond

In 2012, year-end planning was complicated by the great uncertainty over the fate of the Bush-era tax cuts. For more than 10 years, individuals had enjoyed lower income tax rates, but these rates were scheduled to expire after 2012. Moreover, many tax credits and deductions that had been made more generous were also set to expire after 2012. In January 2013, Congress passed the American Taxpayer Relief Act of 2012, which made permanent many, but not all, of the Bush-era tax cuts and also some tax benefits enacted during the Obama administration. Congress also permanently “patched” the alternative minimum tax (AMT) to prevent its encroachment on middle income taxpayers. The result is much greater certainty in year-end tax planning for 2013 because we know what the individual tax rates are in 2014, how many tax credits and deductions are structured, and much more.

Of course, there are always complexities in the Tax Code. In 2013, two new Medicare taxes kicked-in (3.8-percent net investment income (NII) surtax and a 0.9-percent Additional Medicare Tax). In addition, the U.S. Supreme Court ruled that the federal government’s denial of recognition of same-sex marriage was unconstitutional, opening the door to allowing married same-sex couples to file joint federal tax returns and take advantage of other tax benefits available to married couples. Beginning in 2014, some of the most far reaching provisions of the Affordable Care Act will become effective: the individual mandate, the start of Marketplaces to obtain insurance and a special tax credit to help offset the cost of insurance.

Planning for expiring tax incentives

First, do not lose the benefit of some generous, but temporary tax incentives that are available in 2013 but may not be in 2014. Are you planning to purchase a big-ticket item such as a new car or boat? The state and local sales tax deduction (available in lieu of the deduction for state and local income taxes) is scheduled to expire after 2013, and you may want to accelerate that purchase to take advantage of the tax break. A valuable tax credit for making certain energy efficient home improvements, including windows and heating and cooling systems, and a deduction for teachers’ classroom expenses are also scheduled to expire after 2013. These are just some of many incentives that will sunset after 2013 unless extended by Congress. The window for maximizing your tax savings for 2013 is closing. Please contact our office for more details.

Planning for new taxes and rates

Some individuals may be surprised that they owe additional taxes in 2013, even with the extension of the Bush-era tax cuts. Three new taxes are in effect for 2013: the NII surtax, the Additional Medicare Tax and a revived 39.6 percent tax bracket for higher income individuals. The 3.8-percent NII surtax very broadly applies to individuals, estates and trusts that have certain investment income above set threshold amounts. These amounts include a $250,000 threshold for married couples filing jointly; $200,000 for single filers. It should also be noted that trusts will hit the highest tax rate with only $11,950 of retained taxable income.  One strategy to consider is to keep, if possible, income below the threshold levels for the NII surtax by spreading income out over a number of years or finding offsetting above-the-line deductions. If you are considering the sale of your home, and the gain will exceed the home sale exclusion, please contact our office so we can discuss any possible NII surtax.

The Additional Medicare Tax applies to wages and self-employment income above threshold amounts including $250,000 for married couples filing joint returns and $200,000 for single individuals. If you have not already reviewed your income tax withholding for 2013, now is the time to do it. One way to reduce the sting of any Additional Medicare Tax liability is to withhold an additional amount of income tax.

As discussed, ATRA extended the Bush-era tax rates for middle and lower income individuals. ATRA also revived the 39.6 percent top tax rate. For 2013, the starting points for the 39.6 percent bracket are 450,000 for married couples filing jointly and surviving spouses, $425,000 for heads of households, $400,000 for single filers, and $225,000 for married couples filing separately. ATRA also revived the personal exemption phaseout and the limitation on itemized deductions for higher income individuals.

Starting in 2013, ATRA also sets the top rate for capital gains and dividends to 20 percent. This top rate aligns itself with the levels at with the new 39.6 percent income tax rate bracket starts: capital gains and dividends to the extent they would be otherwise taxed at the 39.6 percent rate as marginal ordinary income will be taxed at the 20 percent rate. ATRA did not change the application of ordinary income rates to short-term capital gains. However, individuals should plan for the possibility of being subject to a higher top rate (39.6 percent).

Planning for health care changes

Before year-end, individuals need to review how the Affordable Care Act will impact them. The Affordable Care Act brings a sea-change to our traditional image of health insurance. The law requires individuals, unless exempt, to either carry minimum essential health care coverage or make a shared responsibility payment (also known as a penalty). Most employer-sponsored health insurance is deemed to be minimum essential coverage, as is coverage provided by Medicare, Medicaid, and other government programs. Self-employed individuals and small business owners should revisit their health insurance coverage, if they have coverage, before year-end and weigh the benefits and costs of obtaining coverage in a public Marketplace (or a private insurance exchange) for themselves and their employees. Small businesses may be eligible for a tax credit to help pay for health insurance. Individuals may qualify for a premium assistance tax credit, which is refundable and payable in advance, to offset the cost of coverage. Please contact our office for more details about the Marketplaces, and health insurance coverage for small businesses and individuals.

Individuals with health flexible spending accounts (FSAs) and similar arrangements should take a look at their spending habits for 2013 and predict how they will use these tax-favored funds in the future. In 2013, the maximum salary-reduction contribution to a health FSA is $2,500. Remember that health FSAs have strict “use it or lose it” rules, and the cost of over-the-counter drugs cannot be reimbursed with health FSA dollars unless you obtain a prescription (there are some exceptions).

Individuals who itemize their deductions also need to keep in mind the 10 percent floor for qualified medical expenses. This change took effect at the beginning of 2013. It means that you can only claim deductions for medical expenses when they reach 10 percent of adjusted gross income (for regular tax purposes and for alternative minimum tax purposes). There is a temporary exception for individuals over age 65 for regular tax purposes.

Planning for gifts

Gift-giving is often overlooked as a year-end planning strategy. For 2013, individuals can make tax-free gifts (no tax consequences for the giver or the recipient) of up to $14,000 to any individual. Married couples may “split” their gifts to each recipient, which effectively raises the tax-free gift to $28,000. Gifts between spouses are always tax-free unless one spouse is not a U.S. citizen. In that case, the first $143,000 in gifts made in 2013 is tax-free.

There are special rules for gifts made for medical care and education that can be a valuable component of a year-end tax strategy, especially for individuals who want to help a family member or friend. Monetary gifts given directly to a college to pay tuition or to a medical service provider are tax-free to the person making the gift and the person benefitting from education or medical care.

Gifts to charity also are frequently made at year-end. Through the end of 2013, taxpayers age 70 ½ and older can make a tax-free distribution from individual retirement accounts directly to a charity. The maximum distribution is $100,000. Individuals taking this option cannot claim a deduction for the charitable gift.

Planning for retirement savings

Year-end is a good time to review if your retirement savings plans and tax strategies complement each other. For 2013, the maximum amount of contributions that can be made to an IRA is $5,500, with a $1,000 catch-up amount allowed for individuals over age 50. Keep in mind that the maximum amount that can be contributed to a Roth IRA begins to decrease once a taxpayer’s adjusted gross income crosses a certain threshold. For example, married couples filing jointly will begin to see their contributions begin to phase out when their AGI is $178,000. Once their AGI reaches $188,000 or more, they can no longer contribute to a Roth IRA. For single filers the corresponding income thresholds for 2013 are $112,000 and $127,000. Please note that 2013 contributions, for tax purposes, may be made until April 15, 2014.

Traditional IRAs and Roth IRAs are very different savings vehicles. A traditional IRA or Roth IRA set up years ago may not be the best savings vehicle today or for the immediate future if employment and other personal circumstances have changed. Some individuals may be contemplating rolling over a workplace retirement plan into an IRA. Very complex rules apply in these situations and rollovers should be carefully planned. The same is true in converting a traditional IRA to a Roth IRA and vice-versa. Every individual has unique goals for retirement savings and no one size fits all. Please contact our office for a more detailed discussion of your retirement plans.

Planning for Small Businesses

There are also strategies available for small businesses seeking to maximize tax benefits in 2013.  Two of the business incentives scheduled to end or significantly change after 2013 are the bonus depreciation allowance and the enhanced section 179 expensing provisions.

Bonus depreciation is scheduled to end after 2013 if not renewed by Congress. Additional 50-percent bonus depreciation was extended by the American Taxpayer Relief Act of 2012 (ATRA, signed into law on January 2, 2013) for one-year only and applies to qualifying property placed in service before January 1, 2014. In the case of property with a longer production period and certain non-commercial aircraft, the extension also applies to property acquired before January 1, 2014 and placed in service before January 1, 2015.

Unlike regular depreciation, under which half- or quarter-year conventions may be required, a taxpayer is entitled to the full, 50-percent bonus depreciation irrespective of when during the year the asset is purchased. Therefore, year-end placed-in-service strategies can provide an almost immediate “cash discount” from qualifying purchases, even when factoring in the cost of business loans to finance a portion of those purchases.

An enhanced section 179 expense deduction is available until 2014 for taxpayers (other than estates, trusts or certain non-corporate lessors) that elect to treat the cost of qualifying property (so called section 179 property) as an expense rather than a capital expenditure. The current section 179 dollar cap for 2013 is $500,000. For tax years beginning after 2013, that dollar limit is officially scheduled to plunge to $25,000 unless otherwise extended by Congress. For tax years beginning in 2013, the overall investment limitation is $2 million. That level is also scheduled to fall to $200,000 in 2014. Please contact our office regarding how to best benefit from these provisions in 2013.

Georgia Tax Credits

The State of Georgia has several state specific credits against Georgia income taxes.  Many of you may be aware of or have utilized the Georgia Private School Credit.  Each year Georgia sets aside an amount of money which is available to taxpayers who qualify in advance for the benefit.  Married taxpayers can claim up to $2500 and single taxpayers up to $1000.  Since there is a finite amount available, the fund will be fully utilized well before the end of 2014.  If you wish to claim this credit, you should make it a New Year’s resolution and apply for qualification at the beginning of 2014.  You can get more specific information at http://www.gadoe.org/External-Affairs-and-Policy/Policy/Pages/Tax-Credit-Program.aspx or talk directly with your private school.  This credit is a win/win since you get every dollar up to the limit back on your tax return and you also get a federal income tax deduction on Schedule A if you itemize. 

The film industry in Georgia is entitled to tax credits.  The law allows these credits to be transferred to other taxpayers.  As a result, unused credits are being sold at a discount and you can purchase them to satisfy your Georgia tax liability.  Additionally, you get a full itemized deduction for the amount of the credit but you must report the discount as a short-term capital gain on Schedule D.  An additional benefit is that the credit is treated like withholding and can minimize or eliminate the need for estimated payments and possibly withholding.

A small but frequently overlooked credit is the $150 Driver Education Credit.  If you pay for your child to take a driver’s education course and get a certificate of completion, you are entitled to a credit of the amount spent up to $150.

It should also be noted that the income tax exclusion on retirement income, for taxpayers who are 65 and older, will increase from $100,000 in 2013 to $150,000 in 2014, $200,000 in 2015, and to an unlimited retirement income exclusion effective in 2016.

We have reviewed only some of the many year-end tax planning strategies that could help you minimize your 2013 tax bill and maximize savings.  Please contact our office to schedule an appointment to personalize your 2013 year-end tax planning.

For more information regarding this or any other tax planning concern, please visit the Hoffman & Associates website at www.hoffmanestatelaw.com, call us at 404-255-7400 or send us an email.

In accordance with IRS Circular 230, this article is not to be considered a “covered opinion” or other written tax advice and should not be relied upon for IRS audit, tax dispute, or any other purpose. The information contained herein is provided “as is” for general guidance on matters of interest only. Hoffman & Associates, Attorneys-at-Law, LLC is not herein engaged in rendering legal, accounting, tax, or other professional advice and services. Before making any decision or taking any action, you should consult a competent professional advisor.