Updated Tax Reform Planning – 2017 ACTION NEEDED

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Updated Tax Reform Planning – 2017 ACTION NEEDED

This week Congress passed tax reform with many changes that will affect your 2018 income taxes.  Certain year-end 2017 tax moves may save you tax dollars.

Many itemized deductions have been limited or eliminated, starting in 2018.  Consider accelerating payments for those deductions into 2017 to avoid losing the deductions next year.

The standard deduction for single and married filing joint taxpayers has increased to $12,000 and $24,000, respectively.  Consider the following:

  • If you have not itemized in the past, the increased standard deduction may ensure you won’t itemize for the foreseeable future.  You can likely ignore the balance of this e-mail.
  • If you have itemized your deductions in the past but may fall below these amounts in 2018, consider the acceleration of certain deductions (see below).

Consider the following BEFORE the end of 2017:

  • State and local income/property taxes – For 2018, these deductions will be limited to the aggregate of $10,000. Consider paying your 2017 state income taxes (e.g. 2017 4th quarter estimated state tax payments due in January, 2018) and 2017 property taxes to capture these deductions and avoid the $10,000 cap.
    • BE AWARE – the tax reform bill contains anti-abuse deduction limitations on the prepayment of 2018 state income tax liabilities that are attributable to the 2018 tax year.  Thus, in 2017, you can only deduct state income tax attributable to the 2017 tax year.
  • Mortgage interest – In 2018, the deduction for interest on home equity debt (e.g. monies borrowed for purposes other than a home purchase, but secured against your home) is eliminated.  The deduction for mortgage interest on acquisition indebtedness is limited to mortgage debt up to $750,000.  However, this lower limit on mortgage debt does not apply to any mortgage you have prior to December 15, 2017, grandfathering in your current mortgage.  If you will not itemize in 2018 due to the higher standard deduction, pay your January mortgage payment in December.
  • Charitable contributions and medical expenses – The deductibility of these are unchanged.  However, due to the increase in the standard deduction, you may lose the tax benefit in 2018.  Consider paying any planned charitable contributions or medical expenses before the end of 2017 to maximize their value.
  • Miscellaneous itemized deductions – For 2018, the miscellaneous itemized deduction is eliminated. Acceleration of the payment of these expenses to 2017, including as listed below, may be beneficial:
    • Portfolio / investment related expenses & fees (also, ask your advisor to pay 2018 fees from pre-tax accounts, such as IRAs, when applicable, to retain benefit)
    • Tax preparation fees (unless related to your business, or a rental property)
    • Deductible legal fees
  • In 2018, individual income tax rates are generally lower.  If your income will remain stable from 2017 to 2018, simply accelerating itemized deductions to 2017 may result in greater tax savings.

As we noted in our December 8th email, please keep in mind that Alternative Minimum Tax (AMT) can throw a monkey wrench into these plans.  Please contact our office if there is any concern as to the deductibility of these expenses in 2017 and/or 2018.

Please refer to our website for a summary of the changes in the tax reform bill affecting individuals and businesses.