Final Tax Bill – Analysis and Action Items

Act now for changes caused by the Tax Cuts And Jobs Act Of 2017

On December 15, 2017, the final version of the legislative text was released with the expectation to be signed into law by Tuesday, December 19th.

I can say with confidence that this bill did not make taxes simple again. In fact, it is going to take months or years before we can identify all the new tax strategies available to us.

The complexity tends to lean towards business structure decisions. Individuals with pass-through businesses … this is definitely you.

Where simplicity did occur is with the decision to itemize deductions. I hate referencing stats that I can’t support, but I will do it anyway… In a tax law teleconference last week, it was noted that approximately 30% of taxpayers itemize under the current law. Under the new law, less than 5% will itemize.

This should be welcomed simplicity for many taxpayers.

Simplicity is cool, but you really want to know “what should I do before year-end?”

If you already started planning then you can make your final moves. If you haven’t started planning, then you can react as best that you can.

To pay less tax by year-end, here is what you need to know.

Tax Brackets

The House sought to reduce the number of tax brackets from 7 to 4. However, the final tax reform bill left us with 7 tax brackets.

While we didn’t get the tax bill with the fewest number of brackets, almost all taxpayers can expect a reduction in the overall tax rate they were used to.

Michael Kitces shared another awesome comparison chart of current law versus new law tax rates:

The chart above does NOT show Alternative Minimum Tax (AMT). However, AMT will remain an obstacle going forward. Yet, with fewer people itemizing deductions, there will be fewer people subject to AMT. Couple that with the higher AMT Exemption.

Itemized Deductions

The most notable change for individuals is related to itemized deductions. The higher standard deduction starting in 2018 remained intact ($12,000 individuals; $24,000 married).

The higher standard deduction not only simplifies record keeping and tax filing for many individuals, it may very well reduce your total tax liability. You may lose some “tax benefits,” but a lost tax benefit doesn’t automatically mean a higher tax liability.

If you lose the benefit of these deductions in 2018, then you should consider moving these expenses into 2017.

Here are the changes to itemized deductions that you should be aware of:

  • $10,000 cap on State Income Tax and Property Tax Deductions
    • You have the option to deduct the COMBINED total of property and income taxes capped at $10,000 total. NOT $10,000 each!
    • These new rules explicitly state that any 2018 state income taxes paid by end of 2017 are NOT deductible in 2017. Any pre-paid tax is treated as paid by the end of 2018.
      • You can and should consider paying your 2017 4th quarter state estimated tax by the end of 2017 to receive the 2017 deduction.
    • Remember, AMT could ruin the fun by moving some deductions into 2017.
      • Wisconsin residents may not want to pre-pay their real estate tax in 2017 if AMT will eliminate the benefit. This default move will lose the $300 tax credit against Wisconsin income taxes in 2018.
  • Mortgage interest remains, although at a different level.
    • Cap on mortgage interest on the first $750,000 in acquisition indebtedness on new debt after 12/15/17
    • Existing mortgages retain deductibility on the first $1,000,000 of acquisition indebtedness
      • This includes debt refinanced in the future on existing debt
    • Home equity indebtedness is no longer deductible
      • Reminder:
        • Acquisition indebtedness = a mortgage used to acquire, build, or substantially improve the primary residence
        • Home equity indebtedness = money used for any other purpose
  • Charitable contribution limits expanded
    • Current law limits cash donations to 50% of the taxpayer’s AGI. This is now expanded to 60% AGI
    • Charitable mileage rate was not included in final legislation
  • Medical Expense Deductions expanded for 2017 and 2018
    • AGI threshold is reduced from 10% of AGI to 7.5% AGI
      • This was implemented retroactively to 2017!
    • After 2018, it is scheduled to revert back to 10% AGI
  • Miscellaneous itemized deductions repealed
    • The following expenses are gone at year’s end. Consider prepaying the following:
      • Tax preparation
        • Note, if you own a business or rental real estate this is still an operating expense and deductible going forward
      • Investment advisor
      • Unreimbursed employee expenses

NOTE – the phrase “pre-pay expenses” is used loosely. For some expenses, you can’t pay for 2018’s expense in 2017 and receive a deduction. What you can do is make a January payment in 2017 instead of 2018. Beyond that, you should talk to a qualified tax advisor before making a big payment. It’s possible you can make extra payments, but not guaranteed.

2017 laws that ruin the fun

Paying additional itemized deduction in 2017 is not a guaranteed win. In 2017 we are still fighting the PEASE limitation (i.e. reduction in itemized deductions for high earners) and Alternative Minimum Tax.

If you automatically assume that paying the expense in 2017 is a win, you could be wrong.

Miscellaneous notes and action items

  • Compare current tax brackets to future tax brackets (primarily business owners)
    • Accelerate deductions into 2017?
    • Defer income into 2018?
  • Last chance for Roth Recharacterization
    • Effective 2018 and beyond you cannot take advantage of Roth Recharacterization. The decision to convert to Roth requires more precision.
    • Fortunately, you can recharacterize an excess contribution with no concern of penalty.
  • You can wait to buy your plug-in electric vehicle in 2018. This benefit remains.
  • Live and flip survives. The capital gains exclusion on personal residence of $250,000/$500,000 remains for personal residences lived and used in 2 out of 5 years.
  • Like-kind exchanges are limited to real estate after 12/31/17.
  • Alimony is no longer a deductible or reportable income after 12/31/18.
  • Business car depreciation is increased
    • This provision appears to make buying a new vehicle more appealing than leasing
  • Elimination of business entertainment expenses. Meals and beverages will remain a 50% deduction.
  • Kiddie tax bracket will match trusts and estates. This is a bigger deal for middle income families than high income families.

The bottom line is there are plenty of year-end tax timing opportunities.

Going forward, you will need to make a conscious effort to avoid overpaying tax through long-term planning. If you own a business, you should get on your tax advisor’s calendar by summer 2018 at the latest. Changes to pass-through taxation are experiencing true tax reform. The standard rule of thumbs we were used to are all up for review.

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Do you want to understand how to make your money work for you and keep more of what you have earned?

Reach out to me at nbyers@jbcwealthadvisors.com or schedule a free consultation.

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Disclaimer: This article is provided for general information and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. I encourage you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation. Reproduction of this material is prohibited without written permission from Nate Byers a Madison, WI CPA Financial Advisor, and all rights are reserved. Read the full Disclaimer in the footer below.