2017 Year End Tax Planning Moves for Businesses and Individuals
As 2017 starts to wind down, you may want to consider some strategic planning moves that may help lower your tax bill for this year and possibly next. Of course, significantly compounding the planning challenge this year is the proposed tax reform. Given the uncertainty of what the new law will ultimately be and when it will be effective, any planning decisions must be made with eyes wide open to pending legislation. Communication is critical to the decision-making process. We will closely monitor the tax reform as it progresses through Congress and report any meaningful updates or changes as they are made available.
Tax Planning Moves for Individuals
Many people want to postpone income until 2018 and accelerate deductions into 2017 to lower their 2017 tax bill. This strategy may enable you to claim larger deductions, credits, and other tax breaks for 2017 that are phased out over varying levels of adjusted gross income (AGI). These include child tax credits, higher education tax credits, and deductions for student loan interest. Postponing income is also desirable for those taxpayers who anticipate being in a lower tax bracket next year due to a change in their financial circumstances. Note that in some cases, it may pay to accelerate income into 2017. For example, this may be the case when a person’s marginal tax rate is much lower this year than it will be next year due to a known sale of a capital asset.
Capital Gains and Losses. If you currently have some large realized capital gains, harvest capital losses. You can realize losses on stock while substantially preserving your investment position. There are several ways this can be done. For example, the original holding can be sold, then buy back the same securities at least 31 days later. Minimizing the net capital gains will also help lower the 3.8% surtax on net investment income.
Retirement Savings. Roth IRA contributions are a good way to put money away for retirement; however, there is no current tax deduction when you put money into the Roth. The good news is that when you do take money out of the Roth, it comes out tax-free, including all earnings. Due to income limitations on putting money into a Roth, many people are excluded. One way around this is to do a Roth conversion which converts money from your traditional IRA to a Roth IRA. The money you convert would be subject to taxation in the year of conversion if you are converting pre-tax dollars, but it will grow tax-free and won’t be taxed when you withdraw the money for retirement, so long as it is a qualified distribution. If you currently don’t have a traditional IRA account, you could make a non-deductible contribution to a newly opened account and then immediately convert this to a ROTH with no tax impact.
If you converted assets in a traditional IRA to a Roth IRA earlier in the year and the assets in the Roth IRA account declined in value, you could wind up paying a higher tax than necessary. But you have the option to back out of the transaction by re-characterizing the conversion—that is, by transferring the converted amount (plus earnings, or minus losses) from the Roth IRA back to a traditional IRA via a trustee-to-trustee transfer. This would need to be completed by the due date of your tax return, including extensions. You can later convert back to a Roth IRA.
Employees wishing to defer income to future years should take advantage of maximizing the amount contributed to their employer-sponsored retirement plan. For 401(k) plans, the maximum deferral for 2017 is $18,000 with an additional catch-up contribution of $6,000 for those over 50 years old as of December 31, 2017.
If you have self-employed income, consider putting money into a Simplified Employee Pension (SEP). This option is available to you even if you have already deferred the maximum amount into your employer-sponsored 401(k) plan. By contributing money to a SEP, you can typically avoid both current year federal and state taxes on the amount contributed. The maximum SEP contribution for 2017 is $54,000 and it can be funded as late as the due date of your federal tax return, including extensions.
Health Savings Accounts (HSA). If you become eligible in or before December 2017 to make HSA contributions, you can make a full year’s worth of deductible HSA contributions for 2017.
Medical Expense Deduction. For 2017, medical expenses are only deductible to the extent that they exceed 10% of your adjusted gross income (AGI), even for taxpayers over age 65. Medical expenses include health insurance premiums, Medicare premiums, amounts paid to doctors for medical care, prescriptions, etc. Unless you have a high amount of medical expenses, you most likely will not qualify for this deduction. The House-passed bill, but not the Senate, would eliminate the itemized deduction for medical expenses. If this deduction is indeed chopped in the final tax bill and you can claim medical expenses as an itemized deduction this year, consider accelerating “discretionary” medical expenses into this year. For example, order and pay for new glasses, arrange to take care of needed dental work or install a stair lift for a disabled person before the end of the year.
State and Local Tax Deduction. Pay state income taxes before year-end. If you expect to owe state and local income taxes when you file your return next year, consider asking your employer to increase withholding of state and local taxes (or pay estimated tax payments of state and local taxes) before year-end to pull the deduction of those taxes into 2017. You can also pre-pay any real estate taxes due in 2018. Be sure to measure any alternative minimum tax (AMT) implications of accelerating state and local tax deductions before exercising this planning strategy. It is important to note that state and local tax deductions may be eliminated in future years with the proposed tax reform which is another reason to pre-pay them in 2017. If you are subject to the AMT for 2017 or suspect you might be, accelerating these deductions may not be beneficial.
Charitable Contribution Deduction. Consider making charitable contributions before year-end either in cash or non-cash such as highly appreciated stocks. You can also make contributions at year-end using your credit card, even if the credit card is not paid until 2018. You can write a check to charity and mail it on December 31, 2017, and take a 2017 tax deduction even if the check doesn’t clear your bank until January 2018. Non-cash donations valued over $5,000 (except publicly traded stock) require a written appraisal and a letter from the charity acknowledging the donation to be deductible.
If you are over age 70 ½, you can make a charitable contribution up to $100,000 directly from your IRA to satisfy the required minimum distribution requirement. In the tax reform bill, charitable contributions will remain as a deduction, but the standard deduction will almost double, making charitable contributions less valuable going forward. You may want to consider making 2018 contributions in 2017 to make sure your charitable giving reflects the greatest tax impact. One way to do this is by opening a Donor Advised Fund. This allows you to pre-pay the contributions into a donor-advised account and receive the tax deduction in 2017, then you can decide in later years which charity will receive the money and when.
Miscellaneous Itemized Deductions. Employee business expenses, investment expenses, tax preparation fees and certain legal fees are deductible to the extent that they exceed 2% of your AGI. If you pay IRA fees directly as opposed to having them withdrawn from your IRA, these fees also may be deductible. If you are subject to the AMT for 2017 or suspect you might be, these deductions will likely be lost. Miscellaneous itemized deductions will likely be eliminated after 2017; so if there are any expenses you can pay now, this year may be the last year for the deduction.
Bunch Expenses. You may be able to save taxes on both this and next year by applying a bunching strategy to “miscellaneous” itemized deductions, medical expenses and other itemized deductions.
Home Office Deduction. Expenses for your home office are deductible if your office is used regularly and exclusively. The deduction can be a percentage of the actual expenses or an IRS safe-harbor of $5 per square foot can be used.
Student Loan Interest. You may be eligible to take an above the line deduction for student loan interest paid up to a maximum of $2,500.
Required Minimum Distributions. Don’t forget to take your required minimum distributions (RMDs) from your retirement accounts. These include your IRA, 401(k), or other employer-sponsored retirement plan. RMDs from IRAs must begin by April 1 of the year following the year you reach age 70 ½. Failure to take a required withdrawal can result in a penalty of 50% of the amount of the RMD not withdrawn.
Gifting. Take advantage of the annual gift tax exclusion. Make gifts sheltered by the annual gift tax exclusion before the end of the year and thereby save gift and/or estate taxes. The exclusion applies to gifts of up to $14,000 made in 2017 to each of an unlimited number of individuals. You can’t carry over unused exclusions from one year to the next. The transfers might also save family income taxes where an income-earning property is given to family members in lower income tax brackets who are not subject to the kiddie tax.
The IRS recently withdrew the controversial proposed regulations relating to the estate tax valuation rules. These regulations would have impacted valuation discounts for transfers of family-owned businesses. (See our tax advisor from 8/9/16.)
Tax Planning Moves for Businesses
As with individuals, most businesses will want to lower their income and tax bill in 2017 by postponing income until 2018 and accelerating deductions into 2017. There are multiple strategies that will allow businesses to claim larger deductions, credits, and other tax breaks. Postponing income and accelerating deductions are advantageous for taxpayers who anticipate being in a lower tax bracket next year.
Accelerated Depreciation. Take advantage of generous depreciation rules for assets such as computers, software, equipment, furniture, or certain property improvements purchased in 2017.
- Section 179 – Allows you to expense otherwise depreciable property if placed in service in 2017. You may elect to expense up to $510,000 of fixed asset costs (with a phase-out for purchases greater than $2.03 million). If the cost of your §179 property placed in service during 2017 is $2.54 million or more, you cannot take a §179 deduction. Additionally, the deduction is limited to business income.
- Bonus – In addition to the §179 deduction, your business can also deduct first-year bonus depreciation equal to 50% of the cost of most new (not used) fixed assets with a tax life of 20 years or less. Certain real property assets may be eligible for 50% bonus depreciation if it will be classified as qualified improvement property. The applicable percentage lowers to 40% in 2018, 30% in 2019, and is phased out in 2020.If tax reform is passed, bonus depreciation could increase to 100% for qualifying assets placed in service after September 27, 2017, and before January 1, 2023.
- Vehicles weighing over 6,000 pounds – Business vehicles purchased in 2017 that weigh over 6,000 pounds can be expensed up to $25,000.
De Minimis Safe Harbor Election. Businesses may be able to take advantage of the “de minimis safe harbor election” (also known as the book-tax conformity election). This strategy allows businesses to expense lower-cost assets, and materials and supplies, assuming the costs don’t have to be capitalized under the Code Section 263A uniform capitalization (UNICAP) rules. To qualify for the election, the unit of property cost cannot exceed $5,000 if the taxpayer has an applicable financial statement (AFS; e.g., a certified audited financial statement along with an independent CPA’s report). If there’s no AFS, the cost of a unit of property can’t exceed $2,500. Where the UNICAP rules aren’t an issue, purchase such qualifying items before the end of 2017.
Tax Credits. There are numerous tax credits which can help lessen a business and its owner’s tax burden.
- R&D Credit – Businesses that incur certain research and development (R&D) costs, such as wages, supplies, and contract research, are eligible for this general business tax credit. Eligible small businesses, $50 million or less in gross receipts, may claim the R&D credit against an alternative minimum tax (AMT) liability. Prior to 2016, the R&D credit could not offset AMT and would be carried forward. As an additional incentive, the credit can also be used by certain small businesses against the employer’s payroll tax (i.e. FICA) liability.
- Employee Retention Credit – Businesses located in one of the three designated hurricane disaster areas that were inoperable on any day after the effective date of the hurricane and continued to pay eligible employees during the period of inoperability, are eligible for the credit. The credit is 40% of qualified wages on up to $6,000 in wages paid during the period of inoperability. The effective dates for each storm are as follows:
- Hurricane Harvey – August 23, 2017 – December 31, 2017
- Hurricane Irma – September 4, 2017 – December 31, 2017
- Hurricane Maria – September 16, 2017 – December 31, 2017
Qualified Hurricane Contributions. Cash contributions to relief efforts for one of the three designated hurricane disaster areas are not subject to the general 10% limit. Such contributions are only limited by the business’s taxable income.
Subnormal Goods. Goods that are unsalable at normal prices or unusable in the normal way due to damage, imperfections, shop wear, changes of style, broken lots, or other similar causes may be written down and taken as a deduction provided you offer it for sale at its reduced value within 30 days of the inventory date. The inventory does not need to be sold within the 30-day timeframe.
Accounting Method. Review your tax methods of accounting to determine if you are using the optimal methodologies to maximize tax deductions. Deducting certain prepaid items, accruing for company payroll or bonuses (must be paid within 2.5 months of year-end) and reviewing all depreciation methods are common areas to analyze.
Cash Method. Many businesses, especially service-based business utilize the cash method of accounting. These businesses should accelerate deductions into the current year by bunching expenses to the extent possible.
State and Local Taxes. We are seeing an increase in changes to state tax laws and regulations as well as their approach to tax audits. Most states are becoming increasingly aggressive in trying to capture tax revenue from out-of-state businesses. Specific state and local tax areas to be mindful of include income tax, sales and use tax, payroll tax, and property tax.
Tax Basis. If you own an interest in a partnership or S corporation where losses may be limited due to basis limitations, consider whether you need to increase your basis in the entity so you can deduct a loss from it for this year.
Passive Losses. To reduce 2017 taxable income, consider disposing of a passive activity in 2017 if it will allow you to deduct suspended passive activity losses.
IC-DISC. If your business has foreign sales, consider utilizing an IC-DISC. A business that has export sales and utilizes an IC-DISC can create a tax benefit in which a portion of its income is taxed at the long-term capital gains rate.
Foreign Reporting. The foreign reporting requirements are very comprehensive and complex for businesses with activities outside of the U.S. Business owners and employees who have any financial interest in, or signature authority over a foreign financial account exceeding $10,000 at any time in a calendar year must file a Report of Foreign Bank and Financial Accounts (FBAR). The Foreign Account Tax Compliance Act (FATCA) requires businesses to report and possibly withhold on payments made to foreign entities. Investments, assets, and legal entities outside the U.S. may subject the business to various reporting requirements.
These are some of the year-end steps that can be taken to minimize your tax burden. We can help tailor a customized plan that will work best for your tax planning goals.
Additional ideas and information can be found in our 2017 Tax Planning Guide.
Contact us if you would like to review any of the items we’ve mentioned, schedule a tax planning strategy session, or discuss potential implications of the various tax law changes.
Cindy H. Mitchell?>
John E. Jenkins?>
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