On December 22, 2017, President Trump signed into law a sweeping tax act now known as An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018 (the “Tax Cuts and Jobs Act”). The Tax Cuts and Jobs Act is effective beginning with the 2018 tax year.
Over the coming weeks, we will be alerting you to changes in the tax law and planning ideas that may help to minimize your taxes. However, as we tick down the final days of 2017, here are some things that you may be able to do now to minimize your overall tax burden after the Tax Cuts and Jobs Act becomes effective:
- Pay the final (4th quarter) installment of 2017 state and local estimated income tax no later than December 31, 2017, rather than on the 2018 due date. Note that an individual cannot claim an itemized deduction on a pre-payment of income tax for a future tax year in order to avoid the $10,000 aggregate limitation rule applicable for tax years beginning after 2017 (see more below).
- Pay any assessed real property taxes in 2017. You may want to consider payment of an assessed 2018 property tax installment on or before December 31, 2017 to increase your 2017 itemized deduction for state and local taxes (see more below). The Internal Revenue Service has stated that a pre-payment of anticipated real property taxes that have not been assessed prior to 2018 are not deductible in 2017. State or local law determines whether and when a property tax is assessed.
- Consider the timing of your charitable giving. The Tax Cuts and Jobs Act reduces the top tax rate for 2018 to 37% (down from 39.6%). Consequently, a charitable contribution in 2017 may be worth more to you now than if it is made in 2018 (see more below). With charitable tax planning, there are a host of nuances such as phase-outs and caps that may impact your decision whether to give in 2017 or 2018.
If you are lucky enough to receive the right to purchase tickets for seating at athletic events with your charitable contribution, you may want to make this contribution in 2017. After 2017, no charitable deduction is allowed for a payment to a college or university for which the contributor receives the right to purchase tickets at an athletic event.
But, be wary of the Alternative Minimum Tax (“AMT”) and other limitations and caps on deductions. Before undertaking any strategy to increase your 2017 deductions, you should consider the possible exposure to the AMT for 2017 and other limitations and caps on deductions, based on those larger deductions.
Below are more details on these portions of the Tax Cuts and Jobs Act:
Itemized Deductions Limited to $10,000 for State and Local Taxes. Under pre-Tax Cuts and Jobs Act law (2017 and earlier), individual taxpayers were allowed an itemized deduction for the following state and local taxes and foreign taxes, even though not incurred in a taxpayer's trade or business: (1) state, local, and foreign real property taxes; (2) state and local personal property taxes; and (3) state, local, and foreign income, war profits, and excess profits taxes. Taxpayers could elect an itemized deduction for state and local general sales taxes, instead of the itemized deduction for state and local income taxes.
Under the Tax Cuts and Jobs Act, for tax years beginning after December 31, 2017 and before January 1, 2026, an individual taxpayer’s aggregate deduction for state and local real property taxes, state and local personal property taxes, state and local, and foreign, income, war profits, excess profits taxes, and general sales taxes (if elected) for any tax year is limited to $10,000 ($5,000 for marrieds filing separately), with certain exceptions.
But this $10,000 aggregate limitation rule doesn't apply to the following taxes if they are paid or accrued in carrying on a trade or business or in an activity described in Internal Revenue Code Section 212 (expenses for the production of income): (i) foreign income, war profits, excess profits taxes; (ii) state and local, and foreign, real property taxes; and (iii) state and local personal property taxes. So, deductions for state, local, and foreign property taxes, and sales taxes, that are deductible in computing income on an individual's Schedule C, Schedule E or Schedule F are allowed. For example, an individual may deduct state, local, and foreign property taxes, and sales taxes, if these taxes are imposed on business assets (such as residential rental property).
Be aware that pre-payment in 2017 of 2018 and later year income taxes is barred. For purposes of the $10,000 aggregate limitation rule described above, an amount paid in a tax year beginning before January 1, 2018, for a state or local income tax imposed for a tax year beginning after December 31, 2017, is treated as paid on the last day of the tax year for which the tax is imposed.
Charitable Giving. The Tax Cuts and Jobs Act increases the limitation for cash contributions by individual taxpayers to 60% of the individual's Adjusted Gross Income for taxable years beginning after December 31, 2017 and before December 31, 2026. Deductions for contributions to educational organizations are eliminated entirely when a donor receives the right to purchase tickets for seating at athletic events by providing that no deduction is available for such contributions. These new rules are effective for contributions made in taxable years beginning after December 31, 2017.