Tax reform: 2017 year-end tax strategies
December 21, 2017
On Dec. 22, 2017, the Tax Cuts and Jobs Act was signed into law. Honkamp Krueger & Co., P.C. has had an opportunity to review the provisions of the tax reform and find that the changes under the new tax law will give rise to a series of opportunities and strategies for many taxpayers. Below we are sharing some thoughts on year-end tax strategies of individuals and businesses.
Under the new tax plan 2018, income tax rates will decrease, and many deductions will disappear. We are advising most individuals to accelerate expenses and defer income to put themselves in the best possible situation.
1. State Income Tax – If you are not subject to the Alternative Minimum Tax (AMT), we advise paying all 2017 state income tax by Dec. 31. Furthermore, we are of the opinion that any good faith estimates of 2017 state income tax paid in 2017 are fully deductible regardless if a portion of the estimates constitutes an over-payment and is refunded.
2. Property Tax – We are advising our individual tax payers who are not subject to AMT to pay all accrued property tax liability before year end wherever possible. In Iowa, this means at least paying your March payment. In Illinois, this means paying up to the amount of your most recent tax bill. In Wisconsin, this means paying your 2017 tax bill (now available) in full.
3. Charitable Deductions – In most cases we are advising clients to advance any planned charitable donations to 2017. This is especially true for anybody who purchases college athletic seating licenses as the up to 80% deduction is gone after 2017.
4. Miscellaneous Deductions – We are advising our individual tax payers who are not subject to AMT to pay any expenses categorized as miscellaneous deductions prior to year-end. Among these expenses are investment fees, employee business expenses, union/society dues, and tax preparation fees.
5. Mortgage Interest – We are advising clients to pay all accrued mortgage and home equity loan interest prior to year-end. This may be as easy as moving your automatic payment to the 29th of the month (last business day of 2017).
1. With the reduction in both individual and corporate tax rates and a new deduction for pass-through entities beginning in 2018, an overall strategy of reducing or deferring current taxable income will generally be beneficial. We have recently identified a series of specific accounting method changes that have had the effect of deferring substantial taxable income. The strategies to undertake to defer income are often specific to your industry, and we look forward to the discussion of your revenue streams and the strategies to defer income.
2. Accelerating business deductions can result in tax deferral and tax savings due to decreasing tax rates on business income. Some common strategies to accelerate deductions include:
- Employee bonuses or other compensation
- Cash basis taxpayers can claim this deduction if paid before year-end
- Accrual basis taxpayers can accrue the liability and claim the deduction for 2017 if it is paid within 2½ months after year-end
- 2017 expenses incurred
- Cash basis taxpayers can deduct expenses if paid by year-end. This includes interest on outstanding loan balances
- Accrual basis taxpayers should make sure that all expenses related to 2017 are accrued and recorded as of year-end
- Prepay certain 2018 expenses
- A current year deduction is available for both cash and accrual basis taxpayers
- The prepayment must be for goods or services that will be used in 2018
- Common examples include insurance premiums, software maintenance contracts, advertising and property tax assessments due the following year
3. Depreciation: You may consider advancing the planned purchase of any depreciable assets for use in your trade or business before year-end. With the exception of most real property, assets placed in service after Sept. 27, 2017 are eligible for 100% bonus depreciation. Furthermore, assets no longer need to be new or original use to be eligible for this bonus depreciation. The deduction for depreciation is tied to date the property is placed in service. Generally, property is considered placed in service when it is available for use and not necessarily when it is first used.
4. Other changes in the tax reform act to consider:
- The Domestic Production Activities Deduction is repealed effective for tax years beginning after 2017
- However, there is a new 20% deduction for qualified business Income, including income of pass-through entities and sole proprietorships. This deduction is generally 20% of qualified business income.The deduction is generally limited to 50% of wages paid in the business. However, this limit begins to phase in for taxpayers married filing joint with taxable income of $315,000 and is fully phased in at $415,000. For certain personal service businesses, the 20% deduction is phased out as taxable income exceeds $315,000 for married taxpayers filing joint returns and is fully phased out when taxable income reaches $415,000.
Honkamp Krueger has created a Tax Reform Resource Center on our website. We recommend you bookmark this site and visit frequently as we add information. https://www.honkamp.com/tax-reform-resource-center/
As always, please contact your Honkamp Krueger account manager with any individual questions or concerns at 888-556-0123.