As promised earlier this month, we have an update on the final tax reform legislation and some of the key provisions you may want to consider within the context of your own tax planning.
Itemized Deductions: All miscellaneous itemized deductions and the personal exemption (currently $4,050) are repealed for tax year 2018. As predicted, the standard deduction was increased (to $12,000 individual and $24,000 married filing jointly up from $6,350 and $12,700, respectively) to compensate for the loss of these deductions as well as other itemized deductions, such as taxes and mortgage interest, that are now limited. From a planning perspective, most of these itemized deductions cannot be “prepaid” in 2017 as the liability for those items has likely not been determined or billed. On the bright side, the threshold for the qualified medical expense deduction was reduced from 10% to 7.5% of adjusted gross income.
Income and Property Taxes: The Conference Committee expanded the initial $10,000 deduction for property taxes to also allow the inclusion of state and local income taxes. We continue to suggest paying any property tax bills you receive in 2017. We also suggest paying property taxes related to the 2017 tax year that would typically be paid in 2018 as well as any state and local income taxes applicable to 2017 in order to max out your deductions in the current year. While you cannot “prepay” 2018 income taxes, you can pay those taxes for which you would be responsible as of the last day of 2017. Keep in mind, if you are in Alternative Minimum Tax, you may not receive a benefit from pushing the payment into 2017.
Charitable Giving: We continue to recommend that you consider accelerating your charitable contributions to 2017 to receive the tax benefit, especially if you will not itemize in 2018 due to the new $12,000 and $24,000 threshold. Fortunately, the provision which would have required selling/donating stock based on a first-in, first-out order was dropped from the bill, allowing us to continue to pick and choose specific tax lots for sale or donation.
Business Expenses: The final version retains the provision that allows taxpayers full and immediate expensing of short-lived business assets for five years. Further, it increases the cap on the expensing of qualified business assets to $1,000,000 in hopes of spurring capital investment in 2018 and beyond. The provision that would have reduced the depreciable lives for nonresidential and residential buildings did not make the final version of the bill so no need to hold off until 2018 for any planned purchases of business-use real estate.
We fully expect the bill to be signed into law leaving a very short window for implementation of tax planning strategies for 2017. While we do not yet know the full impact of the legislation on taxpayers, 2018 is certain to be an interesting year as we adapt to the changes and evaluate how this legislation truly affects the nation’s taxpayers.