Congress has passed the Tax Cuts and Jobs Act, a sweeping overhaul and reform of the federal tax code that takes effect Jan. 1, 2018. Below are several actions to consider taking before year-end that may reduce income taxes. In most cases, these suggestions apply to both individuals and trusts.
Pay legal, accounting and investment advisory fees
Under current law, taxpayers not subject to the alternative minimum tax (AMT) are allowed to deduct certain miscellaneous itemized deductions to the extent that they exceeded, in the aggregate, 2 percent of the taxpayer’s adjusted gross income. Included in these miscellaneous itemized deductions are investment advisory, accounting and legal fees.
The act repeals these miscellaneous itemized deductions beginning in 2018. To take advantage of the deductions currently available, consider paying legal fees, accounting fees and investment advisory fees by Dec. 31, 2017, to be deducted on your 2017 return.
Maximize charitable deductions this year
The act increases the standard deduction for individual taxpayers who do not itemize from $6,350 to $12,000 for single taxpayers and from $12,700 to $24,000 for married couples. This, along with the cap on deducting state and local taxes discussed below, will likely reduce the number of taxpayers who have total deductions above the new levels, making it less likely a taxpayer will itemize in 2018. Individuals who do not itemize do not receive a tax benefit from their charitable contribution. Due to this, consider making charitable gifts before Dec. 31, 2017, including gifts planned for 2018. In addition, the act lowers the income tax rates for most individuals beginning in 2018, so charitable contributions this year may provide greater tax savings.
Prepayment of property other state and local taxes
The act sets limits on the amount of state and local taxes (SALT) taxpayers can deduct. Beginning in 2018, the deduction available for SALT will be limited to $10,000 for combined income, property and sales taxes for those who will still itemize. Knowing that taxpayers may be incentivized to pre-pay certain SALT items in 2017 to receive a deduction, the act includes certain restrictions on pre-payment of income taxes.
Anticipating that taxpayers would be inclined to pre-pay income taxes for future years before the end of 2017, the act prohibits pre-payment of 2018 state or local income taxes in order to claim an itemized deduction for 2017. However, taxpayers are still permitted to pay any outstanding tax liability for 2017 taxes. Thus, state or local estimated payments that would otherwise be due in April 2018 may be prepaid by Dec. 31, 2017, and deducted against 2017 income. In addition, beneficiaries of trusts who have received a 2017 distribution (or who will receive a distribution in 2018 that will be treated as a 2017 distribution under the 65-day rule) should consider paying the state and local income taxes on the distributed income before the end of 2017.
Unlike state and local income taxes, property taxes for 2018 can be deducted if paid in 2017. That is, taxpayers who are able and not subject to AMT should consider paying next year’s property tax by Dec. 31, 2017. In a news release on Dec. 27, 2017, the Internal Revenue Service established conditions for the deduction of prepaid state and local property taxes on 2017 returns. The tax bills must be paid before Dec. 31, 2017. In addition, the taxes must have been assessed before 2018. Because property taxes are administered on a state and local level, taxpayers will need to verify the timing of tax assessment and that their county will accept early payment.
For example, Illinois real estate taxes due in 2018 are payable with respect to property owned in 2017. Because the value of the tax is assessed in 2017, the tax may be prepaid in 2017 and the taxpayer may claim a deduction. Conversely, Missouri real estate taxes due in 2018 are based on property owned in that year. The tax will not be assessed in 2017 and a taxpayer will not be permitted to deduct prepaid Missouri 2018 property taxes. For taxpayers with property taxes due in another state, pre-payment will depend on whether that state will accept the pre-payment and on when the tax was assessed.
Defer income to 2018
Because tax rates generally will be reduced under the act, it may make sense to defer income until 2018.
Generally, the idea is to increase and pre-pay items in 2017 that may be deductible and to defer income to 2018. However, the foregoing planning options should first be discussed with your tax advisor to determine the best planning strategy based on the new provisions of the act, the potential for being subject to AMT, and your specific tax situation.