With the Senate Republicans passing a tax bill early this past Saturday, the potential for reform has taken another step forward. As the debate continues, taxpayers who want to take advantage of the new rules should begin thinking about how their personal situation could be affected. HCM is eager to work with you and your tax preparer to help you get the most out of the new law.
Defer or Accelerate – That is the Question
Ordinarily, the best year-end tax strategies depend on your highest tax bracket this year compared to what you think it will be next year. If you expect your tax bracket to remain about the same or decline in next year, you should consider accelerating deductions into 2017 and deferring income to 2018.
Alternatively, if you believe your marginal rate will go up next year, you would typically be better off accelerating income into 2017 and deferring deductions into 2018. However, since a number of deductions that many people use (medical, state and local income taxes, possibly real estate taxes, tax preparation fees, etc.) may disappear next year, you could obtain an advantage by moving certain deductions into the current year by prepaying them. Even for those expenses that are still deductible, a larger standard deduction will render them of little or no value to most tax payers. If you wait until next year to pay these expenses you may receive no tax benefit at all.
Both the House and the Senate have different versions of what they believe are the best tax reform proposals. These different blueprints make it impossible to predict what your tax situation will be next year. However, there are enough common threads to begin laying out the key elements of a strategy so that you are ready to act if a bill is passed before year-end.
Income may be deferred by postponing the sale of investments, shifting year end payroll into next year, and delaying retirement plan distributions (excluding RMDs). Cash basis businesses can delay billing.
To accelerate deductions into 2017, you can prepay state and local taxes (beware of the Alternative Minimum Tax), pay your January mortgage payment in December (verify with your bank that the interest will be reported in 2017), max out your current year retirement plan contributions and schedule and pay for elective medical treatments by the end of the year. Donor Advised Funds are a good way to receive a charitable deduction this year and complete your gifts in the future. Don’t forget that these gifts, as well as other charitable gifts may be funded with appreciated securities. Because some of these deductions may be reduced or eliminated as part of the tax reform package, 2017 could be the year to load up. Different rules and limitations apply, so you should consult your CPA before taking any action.
The following are the most likely changes that will impact HCM clients:
- Elimination of the deduction for state and local taxes
- Loss of ability to recharacterize Roth Conversions
- Additional limitations on certain types of Roth conversions.
- FIFO Basis recognition rules
- Arbitrage tax rate differentials between 2017 and 2018
- Loss of Medical deductions
- Expense bunching opportunities
- Alimony expensing and income recognition
- Mortgage interest expense limitations
- Home equity loan deduction elimination
- AMT risks
Until a new tax law is actually signed, it is difficult to know the best steps to take. However we can look for commonalities in the bills and identify steps that will make sense. It is possible to prepare for these actions so that if the law is passed you will be ready to act. If you would like to discuss this further, please contact your HCM Wealth Advisor:
Mike Hengehold ([email protected])
Casey Boland ([email protected])
Jake Butcher ([email protected])
Jim Eutsler ([email protected])
Greg Middendorf ([email protected])
Steve Hengehold ([email protected])