2017 Year-End Tax Strategies

In light of the sweeping tax reform called “Tax Cuts and Jobs Act,” here are some moves you would need to make before the end of 2017 to benefit from deductions expiring next year, or other changes from the tax reform.

The general plan of action would be to:

• Defer income into 2018, and/or
• Accelerate deductions into 2017

Business tax provisions

Potential tax savings under the new plan include a drop in corporate tax rates from a maximum of 35% to a flat tax rate of 21% and a pass-through entity (PTE) provision that will allow for a 20% deduction of qualified business income (subject to various limitations including a taxable income limitation for businesses offering “professional services”).   Potential tax costs include a limitation on the use of net operating losses (NOL) to cover only 80 percent of taxable income, the inability to use NOL deductions against prior year income, and a limitation on the amount of deductible losses from a pass-through entity.

2017 Year-End Strategies 

If your business operates on cash basis, hold off on your billings to reduce payments received before December 31, 2017 and/or prepaid qualified expenses.

If your business operates on accrual basis, deferral of income until next year is difficult, but not impossible.  With due regard to business considerations, consider postponing the completion of a job until 2018, or defer deliveries of merchandise before next year.  Taking one or more of these steps would postpone your right to payment, and income until next year.

Other options that require action by year-end include establishing a business retirement plan (with funding often not required until next year) or purchasing and placing in service equipment and/or vehicles.

Individual tax provisions

For individual taxpayers, provisions will reduce tax rates to 10%, 12%, 22%, 24%, 32%, 35%, 37% (compared to current – 10%, 15%, 25%, 28%, 33%, 35%, 39.6%).

Defer individual income into 2018.  If you are an employee who believes a bonus is coming your way before year end, or if you are thinking of converting a regular IRA to a Roth IRA, consider delaying both until next year.

Accelerate deductions.  Notable changes in your deductions will include a doubling of the standard deduction, in exchange for state and local tax deductions being limited to $10,000 and the elimination of personal exemptions.  The sizable increase in the standard deduction and limitation on the ability to deduct state and local taxes will cause many more taxpayers to no longer benefit from itemizing deductions in 2018.  Two specific deductions to consider before the end of 2017 are:

• State and local taxes.  Take advantage of the current deductions allowed by paying your 4^th quarter state estimated tax payments before December 31, 2017, if you are not subject to AMT.
• Charitable contributions.  Consider accelerating contributions you planned on making in 2018 to 2017 and donate any non-cash items (e.g. clothing and household items) before the end of the year.

Other year-end strategies

If you are considering buying a home where your mortgage would be over $750,000 (or $375,000 for married, filing separately), try to close before January 1, 2018 so that your mortgage interest deduction is grandfathered in.

In case you are shopping around for health insurance for 2018 to avoid penalty, you may not need to since the bill repeals any penalty for not having health insurance.

Under the new bill, you can withdrawal tax-free funds from a Section 529 Plan to pay for more than just college.  It will include elementary or secondary public, private, or religious school, and various expenses associated with home school.

Further Reading We Approve

Here are the 5 trillion worth of winners and losers in the tax bill

Tax Reform bill changes for businesses