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Tax Cuts and Jobs Act

The passage of the Tax Cuts and Jobs Act (TCJA) has pushed year-end tax planning to literally the last week of the year. The window to act is brief, but there are still opportunities for tax planning available before year-end. 

One of the widest-reaching changes is an increased standard deduction coupled with an elimination of personal exemptions. Beginning in 2018, the standard deduction for single taxpayers will be $12,000 and $24,000 for married couples. Many would be itemizers under the current rules will skip Schedule A in the future. For this cross-section of taxpayers, the tax benefits derived from deductions they itemize will disappear next year, making it valuable to accelerate deductions into 2017. 

If you anticipate switching from the itemized deduction to the standard deduction next year, here are a few things to consider:
  
  • Pre-pay property taxes to take the deduction in 2017. You should check with your county to determine if this is allowed, what amount is due, and how best to pay. If you use ESCROW to pay property taxes, you may still be able to pre-pay and you should check with your mortgage lender. This deduction, together with state and local income taxes, will be limited to $10,000 in 2018. Therefore paying now may be beneficial for those who will still itemize and live in a high tax area. 
  • Pay 2017 estimated state and local income taxes before year-end. You have until January 16, 2018 to make your fourth quarter estimated payments but you need to pay by year-end to take a deduction for 2017. Note you cannot receive a deduction for 2018 income taxes paid in 2017. 
  • Accelerate employee business expenses. Under current law, unreimbursed employee business expenses are deductible if they exceed 2% of adjusted gross income. In 2018 these expenses, and all miscellaneous itemized deductions subject to the 2% floor, will no longer be deductible. 
  • Consider using a Donor Advised Fund. While a charitable deduction will remain, if you no longer itemize you will not benefit from charitable contributions. A Donor Advised Fund allows you to make a large, deductible contribution now and direct distributions to charity in the future. For example, if you donate $1,000 to the United Way each year, you could contribute $10,000 to a Donor Advised Fund today and pay your annual contribution from the fund over the next decade. You would receive the deduction for $10,000 now. 

You should note that certain strategies for accelerating expenses might be thwarted by the Alternative Minimum Tax and may not work for your situation. You should check with your tax preparer. 

The TCJA will cut the marginal tax rates of many individuals. Therefore, it may make sense to defer income into 2018 if you can. Postponing a bonus or Roth conversion may be warranted. Additionally, if you made a Roth conversion in 2017 you may want to recharacterize and pay tax on the amount at a lower bracket. Note that the TCJA also eliminates the ability to recharacterize conversions made in 2018.  

Major changes were made to gift and estate taxes too. If you have used your lifetime exemption and intend to make taxable gifts this holiday season, consider waiting until after the New Year when the exemption doubles. Higher lifetime exemptions will provide transfer tax planning opportunities for many and you may want to revisit your estate plan in the coming year.  

As always, you should check with your tax preparer to determine what strategies make sense for your specific situation. We will continue to monitor and inform you about the changes to the tax code in the coming year.