Congress has finally agreed to pass a major tax revision law, the Tax Cuts and Jobs Act. If passed, this new bill will reduce taxes significantly for those filing jointly with taxable income less than $77,400 and above $165,000.
The purpose of this newsletter is to provide you with a few important year-end tax strategies to reduce your income tax burden in 2017 based on the currently proposed changes to the tax law.
Changes to Itemized and Standard Deductions
Due to the increase in the standard deduction to $24,000 for joint tax filers for tax years beginning January 1, 2018, many of your previously itemized deductions may not be deductible on your tax return in 2018. We recommend making charitable contributions that you planned on making in 2018, before year-end 2017.
State Income Taxes
The new law will limit the deduction of all taxes paid to local and state governments to $10,000. We recommend making your 4th quarter estimated income tax payment to the state prior to December 31, 2017. We also recommend increasing your 4th quarter state estimated tax payment to include any additional state income tax that you expect to owe on your 2017 tax return.
Real Estate Taxes on Principal Residence
State and local property taxes are included in the $10,000 limit mentioned above. We recommend prepaying real estate tax on your principal residence and second homes.
Unreimbursed Employee Expenses
The new law repeals the deduction of miscellaneous itemized deductions (subject to the 2% AGI floor). We recommend prepaying any employee expenses and investment expenses that you would normally deduct on your Schedule A.
The new law reduces the medical deduction Adjusted Gross Income threshold to 7.5% (from 10%) for all taxpayers for tax years beginning after December 31, 2016 and ending before January 1, 2019. We recommend making any outstanding payments for medical, dental, or vision procedures, and/or prepaying for such procedures during the years 2017 and 2018. Grouping medical and dental expenses in either year (2017 or 2018) also should be considered.
Defer Income and Prepay Expenses
Deferral of Income
Due to the new law's lower tax rates for businesses and individuals, we recommend that you defer as much income as possible to 2018.
Prepayment of Expenses
Prepay business expense to the extent possible and economically viable in 2017. Your business can deduct up to the first 2 1/2 months' worth of expenses in the current year for the following year.
Vehicle Purchases and Depreciation
The new law makes the business decision for the purchase of a vehicle much more complex. The law increases additional first-year depreciation on passenger vehicles by $2,000 for vehicles placed in service after January 1, 2018. Vehicle depreciation limits for the succeeding years are increasing as well. We recommend waiting until after January 1, 2018 to purchase a passenger vehicle that has a GVW of less than 6,000 lbs. for your business in order to maximize your depreciation deduction. Exception to the preceding statement: Section 1031 "Tax Deferred Like-Kind Exchanges" will no longer be allowed for vehicles after January 1, 2018. Any purchases of a vehicle with GVW in excess of 6,000 lbs. would best be made in 2017. We think you may need our help if you are planning to trade a vehicle. Each business situation will result in varying planning conclusions. We can recommend if you should purchase in 2017 or 2018.
The new law eliminates the 50% deduction for entertainment, amusement, or recreation. In other words, the "entertainment" portion of your "meals & entertainment" expenses. Business meals will still be 50% deductible. We recommend prepaying for any business entertainment you plan to pursue in 2018, before December 31, 2017 including ticket and box seats.
NOTE -- We will be issuing an additional newsletter later this week with more detailed descriptions of the changes to the law and how they will affect you for the tax year beginning January 1, 2018 and moving forward.
If you have any questions or concerns regarding the new tax bill, please contact us at your convenience and we will assist in any way possible.