Three Key One-Time Planning Opportunities Available in 2017 Under the Tax Cuts and Jobs Act
In the closing days of December, Congress passed the first overhaul of the U.S. tax system in more than three decades. Here are three key planning opportunities to take advantage of before the end of 2017.
Prepay State Income and Property Taxes – Individuals (as opposed to businesses) will only be able to claim an itemized deduction of up to $10,000 for the total of:
(1) state and local income taxes; and
(2) state and local property taxes.
To avoid this limitation, pay the last installment of estimated state income taxes for 2017 no later than December 31, 2017, rather than on the January 15, 2018 due date. But don’t prepay in 2017 a state income tax bill that will be imposed next year – Congress says such a prepayment won’t be deductible in 2017. However, Congress only forbade prepayments for state income taxes, not property taxes, so a prepayment on or before December 31, 2017, of a 2018 property tax installment is apparently OK.
Prepay Charitable Contributions You Were Planning to Pay in 2018 – The itemized deduction for charitable contributions won’t be chopped. But because most other itemized deductions will be eliminated in exchange for a larger standard deduction (e.g., $24,000 for joint filers), charitable contributions after 2017 may not yield a tax benefit for many because they won’t be able to itemize deductions. If you think you will fall in this category, consider accelerating some charitable giving into 2017.
Defer Income into 2018 – Where possible, defer the recognition of income into 2018 as it will be subject to tax at lower rates than imposed in 2017.
A Summary of the Key Changes Impacting Individuals Included in the Tax Cuts and Jobs Act is Provided Below.
Lower Tax Rates
Individuals will be subject to lower tax rates and expanded tax brackets with the top tax rate reduced from 39.6% to 37%. Seven brackets, with a top rate of 37 percent, which married people filing jointly will pay on income they earn in excess of $600,000. If you’re single, the top rate applies to income earned beyond $500,000.
Standard Deduction Increased
For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the standard deduction is increased to $24,000 for married individuals filing a joint return, $18,000 for head-of-household filers, and $12,000 for all other taxpayers, adjusted for inflation in tax years beginning after 2018.
Personal Exemptions Suspended
For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the deduction for personal exemptions is effectively suspended by reducing the exemption amount to zero.
Child Tax Credit Increased
For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the child tax credit is increased to $2,000. The income levels at which the credit phases out are increased to $400,000 for married taxpayers filing jointly ($200,000 for all other taxpayers). The amount of the credit that is refundable is increased to $1,400 per qualifying child. Also no credit will be allowed to a taxpayer with respect to any qualifying child unless the taxpayer provides the child’s SSN. In addition, a new $500 nonrefundable credit is provided for certain non-child dependents.
Capital Gains Provisions Conformed
The Act generally retains present-law maximum rates on net capital gains and qualified dividends.
New Limitations on “Excess Business Loss”
For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the Act provides that a non-corporate taxpayer’s “excess business loss” is disallowed. An excess business loss for the tax year is the excess of aggregate deductions of the taxpayer attributable to the taxpayer’s trades and businesses, over the sum of aggregate gross income or gain of the taxpayer plus a threshold amount. The threshold amount for a tax year is $500,000 for married individuals filing jointly, and $250,000 for other individuals, with both amounts indexed for inflation. In the case of a partnership or S corporation, the provision applies at the partner or shareholder level.
State and Local Tax Deduction Limited
Business Deduction: For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, state, local, and foreign property taxes, and state and local sales taxes, are deductible only when paid or accrued in carrying on a trade or business or an activity described in Code Sec. 212 (generally, for the production of income).
Itemized deduction: A taxpayer may claim an itemized deduction of up to $10,000 ($5,000 for a married taxpayer filing a separate return) for the aggregate of (i) state and local property taxes not paid or accrued in carrying on a trade or business or activity described in Code Sec. 212; and (ii) State and local income, (or sales taxes in lieu of income, etc. taxes) paid or accrued in the tax year.
Mortgage & Home Equity Indebtedness Interest Deduction Limited
For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the deduction for interest on home equity indebtedness is suspended, and the deduction for mortgage interest (applies to both residence and second homes) is limited to underlying indebtedness of up to $750,000 ($375,000 for married taxpayers filing separately). The prior limit was $1,000,000. The new lower limit doesn’t apply to any acquisition indebtedness incurred before Dec. 15, 2017.
Deduction for Personal Casualty & Theft Losses Suspended
For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the personal casualty and theft loss deduction is suspended, except for personal casualty losses incurred in a federally-declared disaster.
Kiddie Tax Modified
For tax years beginning after Dec. 31, 2017, the taxable income of a child attributable to earned income is taxed under the rates for single individuals, and taxable income of a child attributable to net unearned income is taxed according to the brackets applicable to trusts and estates.
Income from Pass-Through Business
Beginning next year and before Jan. 1, 2026, individuals can generally deduct 20 percent of their qualified business income from a partnership, S corporation and sole proprietorship. There is a phase-out for the deduction that begins at $157,500 of individual income and $315,000 of income for couples filing jointly where the income is sourced from a specified service activity (generally, personal service businesses (Law, Accounting, Financial Services, Medical, etc.) Architects and Engineering services have been excluded from the phase-out.