The Tax Cuts and Jobs Act will be signed into law soon. Once enacted, the Act will change many strategies to reduce taxes that worked in the past. Don’t worry the new law will be full of new strategies and loopholes. Below are some tips that can help you take advantage of the new tax law today:
What can I do to take advantage of the lower tax rates?
To take advantage of the Tax Cuts and Jobs Act before its enacted would require you to defer income from 2017 into 2018. Some ideas are as follows:
1. Converting your traditional IRA into a Roth IRA. If you are thinking about converting your qualified plan, then you should wait until 2018. When you convert a traditional IRA into a Roth IRA, assuming you did not make non-deductible contributions, you would report the withdrawn funds from the traditional IRA as ordinary income. By deferring this income to next year with more favorable tax rates, you would reduce your tax liability.
If you made a conversion from a traditional IRA to a Roth, then you can unwind the transaction by doing a recharacterization—making a trustee-to-trustee transfer from the Roth to a regular IRA. The recharacterization must be completed by year end.
If you did not earn a lot of money this year and plan on earning more next year, deferring the conversion to next year may not be a good idea. The gist is that if your income is similar in 2017 to 2018, then you want to take advantage of the lower tax rates in 2018.
2. Deferring taxes if you report on a cash basis. If you operate a cash basis business, income is not taxed until cash is received or paid. Therefore, if you bill in 2018 or at the end of 2017, where it is unlikely that you will receive the money, you can defer the income. Not everything must be tax motivated. If you’re having trouble getting paid and can collect now, a bird in the hand is worth two in the bush. This is the first time that I’ve ever said this phrase.
3. Deferring taxes if your business reports on an accrual basis. Unlike cash basis accounting, accrual basis accounting reports income earned at the time when services or sales are made as opposed to when received. To defer income under this tax strategy, you would have to postpone work or delivery until next year. As stated in the cash basis section, not every business move needs to be tax motivated. Do you want to upset clients by postponing services until next year? I can assure you that Amazon is not postponing their services.
4. Cancellation of Debt. Generally speaking, if your debt is forgiven, this does not include back taxes, then the cancelled debt is considered gross income under the tax code. Therefore, if you are negotiating debt with your creditors, you’d want to wait until 2018 to work a deal to eliminate the debt. That way, the forgiven debt will be taxed under more favorable rates.
Good Bye to Many Deductions.
The Tax Cuts and Jobs Act suspends or reduces itemized deductions, but doubles the standard deduction. The standard and itemized deductions are amounts you are permitted to deduct before applying tax rates. You cannot claim an itemized deduction and a standard deduction. Unless you like to pay taxes, you would claim the bigger deduction. The reduction of deductions will force many taxpayers who itemized to take a standard deduction.
2017 State and Local Tax Deduction (SALT) Strategy
Prior to 2018, you could deduct all of your state and local taxes if you itemized. Under the Tax Cut and Jobs Act, individuals who itemize can claim only up to $10,000 ($5,000 for a married taxpayer filing a separate return) of state and local property taxes and state and local income taxes.
To get one more bite of the deduction, you can pay the final estimated state and local tax payment for 2017 no later than December 31, 2017. If you pay by the 2017 deadline (April 2018), you will lose out on the deduction if your property taxes and state income taxes exceed the $10,000 threshold. It’s worth noting that Congress precluded a prepayment of your 2018 income taxes in 2017, but did not mention prepaying a 2018 property tax installment.
Giving to Charity Now
In order to take charitable deduction, you must itemize. Under the new tax law, less people will itemize in exchange for a larger standard deduction ($24,000 for joint filers). If you think that you’ll take the standard deduction next year, then you would want to make a charitable donation before years’ end.
Incurring Discretionary Medical Expenditures before December 31
The Tax Cut and Jobs Act reduced the floor on out of pocket medical expenditures from 10% -7.5% of your adjusted gross income which is a boost to the deduction. However, in order to claim the deduction, you must itemize your out of pocket medical expenditures. If you won’t be able to itemize deductions in 2018, then you may want to consider accelerating discretionary medical expenditures such as dental work, new glasses, etc. this year.
Alternative Minimum Tax Exemption Increase
Next year, the alternative minimum tax (AMT) exemption amount increases. The AMT is a catchall tax designed to stop wealthy individuals from itemizing their taxes down to zero. Unfortunately, the tax has killed the middle class in high cost states. There could be strategies to take advantage of the increase. For example, the exercise of an incentive stock option (ISO) can result in AMT complications. Accordingly, postponing the exercise of ISO until next year can result in tax savings. There are other various deductions, i.e., depreciation and the investment interest expense deduction that could be curtailed by AMT. Therefore, postponing deductions to next year could a viable strategy.
Like-kind exchanges can avoid the current tax on the appreciation of an asset. After Dec. 31, 2017, such exchanges will be possible only if they involve real estate that isn’t held primarily for sale. If you are considering a like-kind swap of other types of property, do so before year-end. The new law says the old, far more liberal like-kind exchange rules will continue apply to exchanges of personal property if you either dispose of the relinquished property or acquire the replacement property on or before Dec. 31, 2017.
Under current tax code, payments of alimony to your ex is generally an above-the line deduction for the payor and included in the income of the payee. Meaning, the deduction is reported on Page 1 of the tax return Form 1040 with no phase-outs and it does not matter if you itemize or take a standard deduction. Under the new law, alimony payments aren’t deductible by the payor or includible in the income of the payee if your divorce decree or separation agreement is executed after 2017. Therefore, if you are in the middle of a divorce, then you would want to wrap it up this year. If you are the receiving end, you’d want to make it to next year to avoid including the amount as income. If you’re going through a contentious divorce, then you’re probably not wrapping things up soon.
Above are some of the changes and year-end tax strategies that should be considered in light of the new tax law.
Contact the Law Offices of Todd S. Unger, Esq. LLC
Todd S. Unger, Esq. is a tax attorney who resolves tax disputes with the state and IRS. Staying compliant is an essential part of resolving any tax dispute. Compliance does not mean that you have to pay more in taxes. The above year-end tax moves could help reduce your liability. If you would like more details about the new law or are looking to resolve a sensitive tax matter, call tax attorney Todd S. Unger today (877) 544-4743.