2017 Year End Tax Update

I trust this letter finds you enjoying the holiday season!  Congress has enacted what is being described as the biggest tax reform law in thirty years[i].  As I review the new legislation, I believe it will fundamentally change the way you, your family, and your business prepare your federal income tax return, and ultimately the amount of tax you will pay. Most of the changes will go into effect in 2018; however, there may be time before year end to take advantage of certain items in 2017 to best position yourself or your business as we will outline below.   

Tax Cuts and Jobs Act of 2017

The Tax Cuts and Jobs Act of 2017 (TCJA) is now law in the United States.  This newsletter provides a brief description of some of the major provisions and how they may impact you, your families, your business, and your employer.  The goal of the Trump Administration and Congressional Republicans is to stimulate the economy after a long slow expansion following the 2008 great recession.  In theory, reducing the corporate and pass-through business tax rates should induce hiring and capital spending.  New provisions for repatriating international corporate profits for U.S. based companies has the objective to bring those funds to the U.S. for investment in personnel, plant and equipment.  Lower individual rates are designed to provide Americans more money to spend or save as they see fit.[i]  Fewer tax breaks are designed to make the IRS code simpler, although the limitation of state, local and real estate tax deductibility may actually preclude some upper middle class taxpayers, especially those taxpayers of higher taxed states such as New York, New Jersey, and California from realizing a lower overall tax bill.[ii] The Democrats’ argument to this tax legislation is that corporate tax breaks do not lead to job creation.  The bill does not contain enough tax breaks for the middle class but allows most of the individual tax breaks for the wealthy.[iii] Time will certainly be the arbitor of this new tax legislation and the theories both for and against it. 

Game Plan

The overall game plan would be to take advantage of lower tax rates next year by deferring income until 2018.  Additionally, itemized deductions such as real estate taxes could be paid in 2017, as the deductibility may be limited in 2018.

Tax Items of Interest[i]

  • The new standard deduction is $24,000 for married individuals filing a joint return, $18,000 for head of household and $12,000 for all other taxpayers, adjusted for inflation in tax years beginning after 2018.  No changes are made to the current law for additional standard deductions for the elderly and the blind.  Because of the increase in the standard deduction and the changes to the rules for itemized deductions many taxpayers may now find themselves taking the standard deduction versus itemized deductions.[i] 

  • Individuals will only be able to claim an itemized deduction up to $10,000 ($5,000 for a married taxpayer filing a separate return) for the total of (1) state and local property taxes; and (2) state and local income taxes. To avoid this limitation, pay the last installment of estimated state and local taxes for 2017 no later than Dec. 31, 2017, rather than on the 2018 due date. But don't prepay in 2017 a state income tax bill that will be imposed next year – Congress says such a prepayment won't be deductible in 2017.  In many cases, it may be beneficial to prepay your 2018 real estate taxes before year end. 

  • The home mortgage interest deduction has been modified beginning in 2018.  Interest on a home equity loan is no longer deductible.  Interest on a new home mortgage is limited to interest paid on a maximum of $750,000 ($375,000 if MFS) of a mortgage taken out after December 14, 2017.  Taxpayers with a mortgage taken out before December 15, 2017 can continue to claim home mortgage interest on up to $1 million ($500,000 if MFS) going forward; the $1 million ($500,000 if MFS) limit continues to apply to a refinanced mortgage incurred before December 15, 2017.

  • The itemized deduction for charitable contributions remains intact. But because most other itemized deductions will be eliminated in exchange for a larger standard deduction (e.g., $24,000 for joint filers), charitable contributions after 2017 may not yield a tax benefit for many because they won't be able to itemize deductions.  If you believe you will be taking the standard deduction next year, you may consider accelerating some charitable giving in 2017.

     

  • The new law temporarily increases itemized deductions for medical expenses. For 2017 and 2018 these expenses can be claimed as itemized deductions to the extent they exceed a floor equal to 7.5% of your adjusted gross income (AGI). But keep in mind that next year many individuals will have to claim the standard deduction because many itemized deductions have been eliminated. If you anticipate not being able to itemize deductions after this year, but will be able to do so this year, consider accelerating medical expenses, such as dental work or new glasses, into this year.

  • The new law substantially increases the alternative minimum tax (AMT) exemption amount, beginning next year. There may be steps you can take now to take advantage of that increase. For example, the exercise of an incentive stock option (ISO) can result in AMT complications. So, if you hold any ISOs, it may be wise to postpone exercising them until next year.

  • Like-kind exchanges are a popular way to avoid current tax on the appreciation of an asset, but after Dec. 31, 2017, such swaps will be possible only if they involve real estate that isn't held primarily for sale.

  • Although businesses have been able to deduct 50% of the cost of entertainment directly related to or associated with the active conduct of a business, this deduction is disallowed after 2017.  The cost of business meals remains a 50% deduction.

  • Under current rules, alimony payments generally are an above-the line deduction for the payor and included in the income of the payee. Under the new law, alimony payments aren't deductible by the payor or includable in the income of the payee, generally effective for any divorce decree or separation agreement executed after 2017.

  • The new law suspends the deduction for moving expenses after 2017 (except for certain members of the Armed Forces), and also suspends the tax-free reimbursement of employment-related moving expenses.

  • 529 plans currently provide tax deferred growth and tax free withdrawals when used to pay for college.  Under the new tax law, families will be able to withdraw up to $10,000 tax free per year for elementary or high school. [ii]

  • If you are about to convert a regular IRA to a Roth IRA, postpone your move until next year.  That way you’ll defer income from the conversion until next year and have it taxed at lower rates.

  • Earlier this year, you may have already converted a regular IRA to a ROTH IRA but now you question the wisdom of that move, as the tax on conversion will be subject to a lower tax rate next year.  You can unwind the conversion to the Roth IRA by doing a recharacterization – making a trustee-to-trustee transfer from the Roth to a regular IRA.  This way, the original conversion to a Roth IRA will be cancelled out.  But you must complete the recharacterization before year-end.  Starting next year, you won’t be able to use a recharacterization to unwind a regular IRA to ROTH IRA conversion.

  • Under current law, various employee business expenses, e.g., employee home office expenses, are deductible as itemized deductions if those expenses plus certain other expenses exceed 2% of adjusted gross income. The new law suspends the deduction for employee business expenses paid after 2017. The deduction for tax preparation fees and investment interest expenses as miscellaneous itemized deductions subject to the 2% floor has fully been eliminated beginning in 2018.  Personal casualty and theft losses, except for certain losses in federally declared disaster areas, have been fully eliminated beginning in 2018.

  • In 2017, taxpayers claimed a personal exemption for themselves, their spouse (if married filing jointly) and each qualifying child or qualifying relative.  Each exemption reduced taxable income by over $4000 in 2017.  Under the TCJA, personal and dependent exemptions are eliminated in 2018.

  • Through 2025, the TCJA increases the maximum child tax credit from $1,000 to $2,000 per qualifying child.  The refundable portion of the credit increases from $1,000 to $1,400.  That means taxpayers who don’t owe tax can still claim a credit of up to $1,400.  The higher child tax credit will be available for qualifying children under age 17, as under current law.  Also, the child tax credit begins to phase out for taxpayers with modified adjusted gross income (MAGI) of over $200,000 or $400,000 (MFJ).  This phaseout more than doubles the phaseout range under current law.  Taxpayers can’t claim a child tax credit for a child who does not have a Social Security Number (SSM) by the due date of the return.  The TCJA allows a new $500 nonrefundable credit for dependents who do not qualify for the child tax credit.

  • There is a significant new tax deduction taking effect in 2018 that should provide a substantial tax benefit to individuals with qualified business income from a partnership, S corporation, LLC or sole proprietorship[iii].  This income is sometimes referred to as “pass-throughincome. The deduction is 20% of your qualified business income defined as the net amount of items of income, gain, deduction, and loss with respect to your trade or business.  Certain specified service trades in the fields of health, law, consulting, athletics, financial or brokerage services or where the principal asset is the reputation or skill of one or more employees or owners, have exclusions and limitations.

  • If you run a business that renders services and operates on the cash basis, the income you earn isn't taxed until your clients or patients pay. So if you hold off on billings until next year—or until so late in the year that no payment will likely be received this year—you will likely succeed in deferring income until next year.

  • If your business is on the accrual basis, deferral of income until next year is difficult but not impossible. For example, you might, with due regard to business considerations, be able to postpone completion of a last-minute job until 2018, or defer deliveries of merchandise until next year (if doing so won't upset your customers). Taking one or more of these steps would postpone your right to payment, and the income from the job or the merchandise, until next year.

Our LW Gameplan

As your financial fiduciary, the Leshnak Wealth Team cares deeply about your financial well-being.  As always, please call with questions or if you wish to discuss your specific issues in greater detail.

–Bob Leshnak, December 21, 2017

New Tax Rates

FOR MARRIED INDIVIDUALS FILING JOINT RETURNS AND SURVIVING SPOUSES:

If taxable income is:                 The tax is:

--------------------                          -----------

Not over $19,050                      10% of taxable income

Over $19,050 but not                  $1,905 plus 12% of the

  over $77,400                          excess over $19,050

Over $77,400 but not                  $8,907 plus 22% of the

  over $165,000                         excess over $77,400

Over $165,000 but not                 $28,179 plus 24% of the

  over $315,000                         excess over $165,000

Over $315,000 but not                 $64,179 plus 32% of the

  over $400,000                         excess over $315,000

Over $400,000 but not                 $91,379 plus 35% of the

  over $600,000                       excess over $400,000

Over $600,000                       $161,379 plus 37% of the

                                        excess over $600,00

 

FOR SINGLE INDIVIDUALS (OTHER THAN HEADS OF HOUSEHOLDS AND SURVIVING SPOUSES):

If taxable income is:                 The tax is:

--------------------                         ----------

Not over $9,525                       10% of taxable income

Over $9,525 but not                   $952.50 plus 12% of the

  over $38,700                           excess over $9,525

Over $38,700 but not                  $4,453.50 plus 22% of the

  over $82,500                           excess over $38,700

Over $82,500 but not                  $14,089.50 plus 24% of the

  over $157,500                          excess over $82,500

Over $157,500 but not                 $32,089.50 plus 32% of the

  over $200,000                          excess over $157,000

Over $200,000 but not                 $45,689.50 plus 35% of the

  over $500,000                          excess over $200,000

Over $500,000                         $150,689.50 plus 37% of the

                                         excess over $500,000

 

FOR HEADS OF HOUSEHOLDS:

If taxable income is:                 The tax is:

--------------------                         -----------

Not over $13,600                      10% of taxable income

Over $13,600 but not                  $1,360 plus 12% of the

  over $51,800                           excess over $13,600

Over $51,800 but not                  $5,944 plus 22% of the

  over $82,500                          excess over $51,800

Over $82,500 but not                  $12,698 plus 24% of the

  over $157,500                          excess over $82,500

Over $157,500 but not                 $30,698 plus 32% of the

  over $200,000                          excess over $157,500

Over $200,000 but not                 $44,298 plus 35% of the

  over $500,000                          excess over $200,000

Over $500,000                         $149,298 plus 37% of the

                                         excess over $500,000

  

FOR MARRIEDS FILING SEPARATELY:

If taxable income is:                 The tax is:

--------------------                  ----------

Not over $9,525                       10% of taxable income

Over $9,525 but not                   $952.50 plus 12% of the

  over $38,700                           excess over $9,525

Over $38,700 but not                  $4,453.50 plus 22% of the

  over $82,500                           excess over $38,700

Over $82,500 but not                  $14,089.50 plus 24% of the

  over $157,500                          excess over $82,500

Over $157,500 but not                 $32,089.50 plus 32% of the

  over $200,000                          excess over $157,500

Over $200,000 but not                 $45,689.50 plus 35% of the

  over $300,000                          excess over $200,000

Over $300,000                         $80,689.50 plus 37% of the

                                         excess over $300,000

 

FOR ESTATES AND TRUSTS:

If taxable income is:                 The tax is:

---------------------                        -----------

Not over $2,550                       10% of taxable income

Over $2,550 but not                   $255 plus 24% of the

  over $9,150                            excess over $2,550

Over $9,150 but not                   $1,839 plus 35% of the

  over $12,500                            excess over $9,150

Over $12,500                          $3,011.50 plus 37% of the

                                         excess over $12,500

The investment decisions are those of Robert M. Leshnak, Jr., CLU, ChFC, CFP®, MS, EA as of 12/21/2017 and are subject to change.  The information contained herein is only intended for Leshnak Wealth clients invested in the Leshnak Wealth Portfolio Models.  No forecasts or recommendations are guaranteed.  The technical data utilized as part of the investment decisions does not guarantee future positive results. Performance, especially for short periods of time, should not be the sole factor in making investment decisions.  The information contained herein does not constitute client specific investment advice or take into account a specific client’s particular investment objectives, strategies, tax status, resources, or investment time horizon. No investment strategy such as asset allocation, diversification, tactically overweighting sectors, or utilizing fundamental and technical analysis can always assure a profit, nor always protect against a loss.  The information presented is not intended to be a substitute for specific individualized tax, legal, or financial planning advice.  The payment of dividends is not guaranteed. Companies may reduce or eliminate the payment of dividends at any given time.  Investing involves risks in regards to all of the investment products mentioned in this commentary, including the potential loss of principal.  International investing involves additional risks including risks associated to foreign currency, limited liquidity, government regulation, and the possibility of substantial volatility due to adverse political, economic, and other developments.  The two main risks associated with fixed income investing are interest rate and credit risk.  Typically, when interest rates rise, there is a corresponding decline in the market value of bonds.  Credit risk refers to the possibility that the insurer of the bond will not be able to make principal and interest payments.  Investments in commodities may entail significant risks and can be significantly affected by events such as variations in the commodities markets, weather, disease, embargoes, international, political, and economic developments, the success of exploration projects, tax and other government regulations, as well as other factors.  Indexes are unmanaged and investors are not able to invest directly into any index.  Past performance is no guarantee of future results.  Please note that individual situations can vary.  Therefore, the information presented here should only be relied upon when coordinated with individual professional advice.

[i] Pickering, Kathy. “How the Tax Cuts and Jobs Act Impacts US Tax Returns; HR Block.com December 20, 2017

[ii] Pickering, Kathy. “How the Tax Cuts and Jobs Act Impacts US Tax Returns; HR Block.com December 20, 2017

[iii] Rapoport, Michael.  “Pass-Through Rules Remain Complex”; The Wall Street Journal December 20, 2017

 

[i] “2017 Tax Reform: Checkpoint Special Study on Individual Tax Changes in the “Tax Cuts and Jobs Act””: Thompson Reuter Accounting News, December 20, 2018

 

[i] Timiraos, Nick and Davidson, Katie.  “Plan to Test GOP’s Economic Pledge”; The Wall Street Journal December 20, 2017

[ii] Pickering, Kathy. “How the Tax Cuts and Jobs Act Impacts US Tax Returns; HR Block.com December 20, 2017

[iii] Bender, Michael & Hook, Janet & Reuben, Richard.  “Tax Vote Seals Victory for Trump”; The Wall Street Journal December 21, 2017

 

 

[i] Bender, Michael & Hook, Janet & Reuben, Richard.  “Tax Vote Seals Victory for Trump”; The Wall Street Journal December 21, 20