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.