Significant Provisions of the Tax Act and How to Prepare for Year End

Most of the provisions of the Act would become effective for tax years beginning after 2017, with many of the individual income tax provisions expiring after 2025.

Individual Income Tax highlights

  • The Act replaces the current seven individual tax brackets with rates ranging from 10% to 37%.
  • The Act nearly doubles the standard deduction for taxpayers and eliminates personal exemptions.
  • Itemized deductions are mainly limited to home mortgage interest; state and local income, sales, and property taxes; and charitable contributions.
    • The Act limits the deductions for state and local income, sales, and property taxes to $10,000
    • The Act retains the home mortgage interest deduction for new mortgages for principal and second residences, but limits the interest deduction to a $750,000 mortgage. The deduction for home equity interest is eliminated.
    • The Act slightly increases the allowable deduction for cash contributions to public charities and otherwise retains the current charitable contribution deduction rules
  • For divorce decrees and separation agreements entered into after 2018, alimony would no longer be deductible by the payor and would not be taxable to the payee.
  • The Act retains the individual alternative minimum tax (AMT) with increased exemption amounts.
  • The Act contains many other provisions that affect numerous other deductions and credits for individuals.
  • The Act repeals the individual mandate of the Affordable Care Act.
  • The Act changes the method for calculating inflation indices so amounts indexed for inflation will grow more slowly.

Wealth Transfer Tax highlights

  • The Act retains the estate, gift, and generation-skipping transfer (GST) tax and doubles the exemptions for the period 2018-2025.
  • Heirs will continue to have a fair market value basis in inherited assets under both bills, and the gift tax remains in place.
  • Portability of a deceased spouse’s unused exemption is retained.

Corporate and Business Tax highlights

  • The Act reduces the corporate tax rate to a flat rate of 21%.
  • The Act provides a deduction of 20% of qualified business income from a partnership, S-Corporation or sole proprietorship, which results in an effective top rate of 29.6%, subject to a phase-out.
  • The Act allows a 100% first-year expensing of certain depreciable assets for assets placed in service by September 27, 2017, along with a limitation of interest expense deductions.
  • The Act increases Section 179 expensing limits.
  • The Act repeals the corporate AMT.
  • The Act limits net operating loss deductions.
  • The Act imposes a one-time repatriation tax of 15.5% on earnings and profits (liquid) and 8% on illiquid.
  • The Act moves to a territorial tax system for the taxation of income.

Provisions with no changes

  • No change made to the specific identification method for sale of stock (or donative transfers to family or charity), so transfers of stock are not required to be made on a First-in, first-out (FIFO) basis.
  • The contribution limits for IRAs and 401(k) plans are unchanged.
  • The Act does not change the capital gains tax, net investment income tax, or the Medicare surtax.

While we do not provide tax advice, we offer some suggestions to consider with your tax advisors.

  1. Call your accountant to do an estimate of your 2017 taxes before December 31.
  2. Consider whether to prepay 2017 state and local income and/or property taxes, up until the point that it puts you in AMT for 2017. Note that you cannot prepay any 2018 income tax. Consult your tax advisor on whether any part of your property tax may be paid in advance. In 2018, the deduction for state and local income and property taxes will be limited to a total of $10,000. It is important to have your tax advisor run the projected tax impact; for many taxpayers in high-tax states who are already subject to the AMT, a prepayment would not be of benefit.
  3. Check your tax brackets to see if you will be in a different tax bracket and what the marginal tax rate will be next year. If it is a lower rate than this year, then consider deferring income to next year.
  4. Determine whether you will be able to itemize deductions in 2018, in light of the increased standard deduction and the reduced deductions available.
  5. If you are a sole proprietor, LLC member, or partner in a partnership, consider deferring income until next year to take advantage of the new pass-through income deduction.
  6. If you will continue to be an itemizer in 2018, consider whether to defer charitable contributions until next year when there is no phase- out of itemized deductions. Also the AGI limitation for cash gifts to public charities will increase from 50% to 60%.
  7. Consider increasing charitable contributions in 2017 if you won’t have itemized deductions in excess of the standard deduction for 2018, but check on the impact of the phase-out of itemized deductions and the AGI limits on the charitable deduction. It may make sense to set up a donor advised fund so that the donation is deductible in 2017, but distributions can be given to charities in future years.
  8. Consider paying medical expenses this year if it will allow you the medical expense deduction and you won’t be able to itemize next year.
  9. Consider paying expenses that can still be itemized this year, such as tax return fees, appraisal fees for charitable contributions, investment fees and expenses, IRA fees, safe deposit box fees, etc.
  10. Alimony will remain deductible in 2018, but will be disallowed under agreements entered into after December 31, 2018. So If you are in a divorce situation, try to get a property settlement agreement executed by December 31, 2018.
  11. Finalize at least one part of a like-kind exchange of property other than real estate by the end of 2017.
  12. The conference bill doesn’t contain the FIFO rules for accounting for stock, so investors may continue to use specific identification for the sale or transfer of stock.