Significant new tax changes for both individuals and businesses have just been enacted, with most provisions becoming effective in 2018. Because of the dramatic changes in rates and permissible deductions, certain 2017 year-end tax planning actions may be beneficial for you. This Alert describes a few items for consideration.
Notable tax law changes include:
- The maximum tax rate on corporations is reduced from 35% to 21%.
- The maximum tax rate on individuals is reduced from 39.6% to 37% and the rate brackets are expanded.
- Individual itemized deductions for state and local taxes are limited to $10,000 per year and several other deductions are eliminated.
- The standard deduction for individuals who don’t itemize increases dramatically ($12,000 for single filers, $24,000 for joint filers).
- Owners of many “pass-through” business entities will receive a new deduction equal to 20% of their allocable income.
The following are some year-end considerations:
- Prepayment of State and Local Taxes. The new legislation will limit itemized deductions for state and local taxes (income, property and sales taxes) to a total of $10,000 per year. Consider paying by December 31, 2017 your final 2017 state and local income tax liabilities and your winter home real estate tax bills. However, you should consider the potential 2017 consequences of the alternative minimum tax and the limitation on itemized deductions.
- Acceleration of Contributions. With the large increase in the individual standard deduction ($12,000 single filers, $24,000 joint filers) and the new limitations on various itemized deductions starting in 2018, you may not have enough itemized deductions in 2018 to benefit from contributions. Also, if your individual marginal tax rate in 2017 will be higher than in 2018, a 2017 contribution may save you more taxes. Consider accelerating your expected 2018 charitable contributions into 2017. If you make charitable contributions to a university as a condition to the right to purchase tickets to athletic events, consider accelerating your 2018 payment into 2017 because such contributions made after 2017 will no longer be eligible for an 80% deduction.
- Deferral of Sale Gains. If you have potential sale gains that would be taxed as ordinary income, consider either deferring the sale into 2018 or taking payment in installments. Your effective tax rate may be lower in 2018 than in 2017. Corporate taxpayers will see a maximum 2018 rate of 21%. Individual taxpayers will receive the benefit of a lower top income tax rate (37%) and expanded rate brackets. The 2018 capital gains tax rate remains the same as in 2017.
- Designating a Partnership Representative. If you are involved in an entity taxed as a partnership (such as a partnership and most limited liability companies) be sure to amend your partnership agreement or operating agreement to designate a partnership representative and the scope of their authority. Starting with tax audits of tax years beginning after 2017, the partnership representative will be the entity’s contact with the IRS and will have new significant authority and responsibilities.
- Retirement Plan Contributions. Consider maximizing your deductible 2017 retirement plan contributions to a 401(k) plan or traditional IRA. If you may not be making maximum annual contributions, consider accelerating into 2017 part or all of what you would have normally contributed in 2018 if your marginal individual tax rate for 2017 will be higher than in 2018.
- Take Capital Losses. Consider selling in 2017 any securities positions with losses to offset 2017 capital gains and to possibly claim up to a $3,000 capital loss against other income. A proposed new rule requiring FIFO (“first-in, first-out”) identification of securities sold was dropped in the last version of the tax bill.
- Deferral of Income. If it appears that your 2018 individual or corporate marginal tax rates in 2018 will be lower than in 2017, consider whether you can defer any income recognition until 2018. Income from certain pass-through business entities (like partnerships, Subchapter S corporations and most limited liability companies) may qualify for a 20% deduction starting in 2018.
- Buy an Electric Car. If you are considering a purchase of an electric car, purchase one and place it in service this year. The current tax credit expires in 2018.
- Business Asset Acquisitions. If you plan to acquire assets for your business, consider whether it is more beneficial to purchase in 2017 while the tax rates are higher or defer until 2018 when the new depreciation and expensing rules will be more advantageous.
- Potential Like-Kind Exchanges. If you plan to make a business or investment like-kind exchange of property other than real estate, consider accelerating it into 2017 because such exchanges will be taxable after 2017.
- Entertain Now. All entertainment related expenses will be fully disallowed for items paid or incurred after 2017. Consider client entertainment in 2017.
- Sell a Business Patent. If you plan to sell a business patent, do it in 2017. It may qualify for the lower capital gains tax rate. After 2017, any gain will be ordinary income.
The new legislation is lengthy and very complex. This Alert highlights several year-end planning considerations, but there are many other important planning actions for individuals and businesses to evaluate in 2018. If you would like to learn more about the new tax rules and other possible planning actions, please contact Steven Grob (firstname.lastname@example.org), Michael Cumming (email@example.com), Robert Nelson (firstname.lastname@example.org), or any of our other Dykema tax attorneys.
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