Tax reform legislation remains a moving target. While we have a lot of information to work with, we must sit still and wait while the House and Senate versions of the bill are reconciled. Given the scope of the topic and widespread interest in the impact of the likely changes to come, we wanted to share some preliminary thoughts based on what we do know. Following are a few of the provisions you should evaluate now within the context of your own tax planning so that you are prepared to take action if necessary by the end of 2017.
Itemized Deductions: Many itemized deductions and the personal exemption are almost certain to be repealed for tax year 2018. The standard deduction will be increased to compensate for the loss of these deductions, meaning that fewer individuals will need to itemize – a potential time saver in the future. You may want to accelerate some itemized deductions (taxes, charity, etc.) into 2017, since in some cases little, if any, benefit will be available in 2018. Additionally, tax rates are likely at their highest now so any accelerated deductions will provide a benefit at the current, higher rates.
Prepay Taxes: Since the property tax deduction may be limited to $10,000 in 2018, it may make sense to prepay these taxes now, in addition to state and local income taxes which may no longer be deductible in 2018. Given that many people will not itemize under the proposals, there is the chance that you will not receive any benefit for your property taxes next year. Please keep in mind that if you are in AMT, you may not receive a benefit this year for prepaying. You must run the numbers to know for sure.
Charity: Under the proposal, donations to charity in 2018 will only help reduce your taxable income if your total itemized deductions, charity, property tax ($10,000), mortgage interest and allowable medical expenses, exceed the $24,000 standard deduction. If your 2018 deductions won’t cross that threshold, you should consider accelerating your donations into 2017 to receive the full benefit for your contribution. Additionally, if you have low-basis stock in specific lots that you wish to contribute, the current bill will restrict your ability to identify which stock lot you can use and will require you to use the oldest lots first. If you want the freedom to pick and choose, 2017 may be your year.
Business Expenses: Business owners looking to purchase assets would benefit from the proposal that accelerates asset expensing. Allowable expensing would be capped at $1 million and immediate expensing would be raised to 100% of cost for short-lived capital investment. Real property purchases (buildings) would also benefit from a reduced depreciable life of 25 years. Should this pass, you might want to consider holding off until 2018 to make that next big purchase.
Though we won’t know the actual provisions until the law is finalized and passed, we are fairly confident that these few steps will be worth evaluating prior to year-end. Stay tuned for additional guidance if the bill is signed into law.