The House and Senate
approved the Tax Cuts and Jobs Act bill December 20, 2017. The President signed it December 22, 2017. The tax bill is massive, weighing in at 1,097
pages including the Conference Committee report. It will take some time to digest all the
changes, but every taxpayer and business is affected. What can you do right now to cut your taxes?
Accelerate Deductions
Deductions save
more taxes when tax rates are high.
Since overall tax rates will decline in 2018, it may make sense to
prepay some expenses by December 29th, such as paying your January
2018 home mortgage payment early, advance funding your 2018 charitable giving,
prepaying any 2017 state income taxes that would otherwise be due as an
estimated tax payment in January or would be due with your tax return, and
harvesting any capital losses in your investment portfolio. Check your individual circumstances. If your income will be higher in 2018, you
might be in a higher tax bracket next year.
Note that prepaying in 2017 your 2018 state income tax will not be
deductible according to the Conference Committee report. It is uncertain whether prepaying your 2018
real estate tax will be deductible, but the report did not expressly prohibit
it. On December 27, 2017, the IRS released an advisory that "A prepayment of anticipated real property taxes that have not been assessed prior to 2018 are not deductible in 2017."
The standard
deduction will be increased in 2018 to $24,000 for joint tax returns and $12,000
for singles. If your total itemized
deductions approximate these amounts, you may wish to “bunch” your deductions
into every other year to more efficiently use your deductions. For example, you may wish to bunch deductions
into 2017 and then again in every odd numbered year.
Delay Income
Send invoices
late in the month to avoid receipt in December, defer deliveries of merchandise
to customers, and work with your employer to postpone receipt of a bonus while
avoiding constructive receipt. Postpone
converting a traditional IRA to a Roth IRA until 2018. Delaying income to 2018 may allow it to be
taxed at lower tax rates. Again, you
must look at both 2017 and 2018 taxes to know the right course of action for
your situation.
Roth IRA Recharacterizations
The ability to
recharacterize a Roth IRA conversion is repealed after 2017. If you have already converted a traditional
IRA to a Roth IRA during 2018, you may wish to consider unwinding the conversion
by a recharacterization by December 29th in a couple of
circumstances. First, if the value of
the account has declined from the value at the time of conversion,
recharacterize so that you don’t pay tax on value that no longer exists. Second, if the account hasn’t appreciated too
much, consider recharacterizing now and reconverting in early 2018 if your tax
rate on the reconversion will be less than your 2017 tax rate on the original
conversion.
If Subject to 2017 Alternative Minimum Tax
If you are
subject to AMT in 2017, and the amount of the AMT exemption has been fully
phased out due to high income, then you are subject to an effective 28% Federal
tax rate. Since the impact of the
individual AMT is greatly reduced in 2018 and likely not to apply, you might
find that your marginal 2018 tax rate is greater than 28%. In such a case, you should consider
exercising nonqualified stock options, accelerating bonuses, or converting a
traditional IRA to a Roth IRA before the end of 2017. In addition, you should consider deferring
charitable deductions to 2018. Incentive
stock options should be exercised in 2018 when the AMT is much less likely to
apply to the AMT ISO preference.
Business Equipment
If you are
planning to purchase business equipment in 2018, consider purchasing and
placing in service the equipment before the end of 2017. Bonus depreciation is increased to 100% for
equipment and machinery purchased and placed in service after September 27,
2017. Taking bonus depreciation in 2017
when tax rates are high will likely save more taxes than if done in 2018.
