Take Advantage of Tax Reform - The Top Tax Moves to Make Before Year-End

December 19, 2017

With tax reform winding its way through Congress, it is critical that you understand how this legislation might impact you. Of immediate importance, you need to understand the decision points before year-end to maximize your tax situation.

The new legislation totals 1,100 pages of new law and commentary, and it most definitely is not a simplification of the tax code. This article will not attempt to unpack the complexities in the new law, but to focus you on the most important things to consider before year-end. Since every taxpayer has a unique situation, some of the most common tax strategies will be organized around a series of questions.

Question #1 - Will you be switching from an itemized deduction to a standard deduction?

You need to understand if you are going be taking the new higher standard deduction in future years. The new law provides a standard deduction of $24,000 for married couples filing jointly, $18,000 for head-of-household filers, and $12,000 for all other individuals. This is almost double the prior standard deduction limits, and will result in many more taxpayers taking a standard deduction instead of itemizing.

If you will be taking a standard deduction in 2018 under the new law, but expect to itemize in 2017, you should consider accelerating itemized deductions into 2017 where possible in order to capture a benefit. The top candidates for acceleration are state and local income taxes, property taxes, and charitable deductions.

For charitable deductions - consider accelerating your 2018 planned charitable contributions into 2017. For some taxpayers, using a “donor-advised fund” is preferred, allowing contributions to be made and deducted now, but funds to be disbursed to charities over time.

Question #2 - Will your real estate and state income tax deduction be limited?

Under the new legislation, the total deductible real estate taxes and state income taxes are limited to $10,000 per year. If you expect your 2018 tax payments to exceed this threshold, consider accelerating these payments into 2017.

In many states, real estate taxes can be paid early in order to capture them before year-end. For example, most South Dakota counties permit the payment of taxes in 2017 that would normally be payable in 2018. You should check with your state and county to determine the prepayment rules that may apply to you. In Illinois, Cook County for example permits only 55% of the property tax bill to be paid early (https://www.cookcountytreasurer.com/prepayment.aspx), where Kane County permits 100% of the prior year liability to be paid early. Make sure to consult your local treasurer's office to determine what options may be available for your property taxes.

State income taxes can be accelerated by making a tax estimate prior to year-end. Be careful about prepaying any 2018 state income tax liabilities, as there are restrictions on this.

Question #3 - Will you be in Alternative Minimum Tax in 2017?

If you will be subject to Alternative Minimum Tax (“AMT”) in 2017, many of your itemized deductions will not benefit you. For example, real estate and state income taxes are not deductible for the AMT, and neither are miscellaneous itemized deductions. If you will be subject to the AMT in 2017, it may not benefit you to accelerate these deductions into 2017.

Question #4 – Do you have any income that can be deferred into 2018?

For many taxpayers, deferring income into 2018 is a good idea. In general, tax rates will be lower in 2018 under the new legislation, and income from a pass-through business may be eligible for a 20% deduction. You need to know your tax brackets and do a detailed projection however, as some circumstances may cause income recognition in 2017 to be preferable.

Keep an open mind, and consult with your tax advisor for ideas to time the recognition of income. For example, one common but little-recognized opportunity is the potential for businesses to make accounting method changes to change the timing of 2017/2018 income or expense recognition.

Question #5 – Is your business structure ideal for the new tax framework?

Make sure you understand your current business structure, and how that will be taxed under the new rules. For example, the new 21% C corporation tax rate may be compelling for certain businesses that are currently structured as pass-through entities, particularly if those entities won’t be benefiting from the new 20% passthrough-entity tax deduction rules. Also, some pass-through entities will need to tweak their structure and activities to make sure they comply with the deduction eligibility requirements, and to maximize the deduction benefits.

Final Thoughts

The new tax legislation represents a significant opportunity for many taxpayers. You should make an effort to understand how the new rules may apply to you, and consult with your tax advisor to explore the many nuances. It is also highly recommended that a multi-year income projection be completed so you can see the impact of shifting income and deductions between years. The tax system is multi-faceted, and you need to make sure you understand all of the implications for the decisions that you’re making.