Year End Tax Planning for Tax Cuts and Jobs Act
***This blog has been updated on December 21, 2017 to reflect updates to the tax bill approved by the conference committee and the legislative process***
The Tax Cuts and Jobs Act (Now officially named “To provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018”) has passed both chambers of Congress and is awaiting the signature of the President.
Republican control of the White House and Congress has created a historic opportunity for substantial tax reform. The Conference Committee approved bill of the Tax Cuts and Jobs Act was signed on December 15, 2017. Republican lawmakers have passed the Tax Cuts and Jobs Act, which includes many structural changes to the tax code that will have a dramatic impact on all businesses and most individuals personal finances. While the legislation is not law yet (the differences between the Senate and House versions need to be reconciled and voted on), the themes of the versions passed by the House and Senate are similar enough to present some potential year end tax planning opportunities.
Year End Tax Planning – Individual
- Pay State income taxes before December 31, 2017. The deduction for state and local income taxes and property taxes will be limited to $10,000 combined in the final version of the Tax Cuts and Jobs Act. State income taxes for 2017 that are not paid December 31, 2017 will not be deductible. Only 2017 state income taxes can be paid and deducted in 2017. The conference committee approved bill explicitly disallowed prepayment of state taxes (i.e. 2018 taxes paid in 2017).
- Pay property taxes before December 31, 2017.. If your jurisdiction allows prepayment of property taxes, you should consider preparing those taxes to get a 2017 deduction. State income and property taxes will be limited to $10,000 combined in the final version of the Tax Cuts and Jobs Act. Additionally, the standard deduction will approximately double in 2018 causing fewer taxpayers to benefit from utilizing deductions.
- Home equity debt may not be deductible under the Tax Cuts and Jobs Act starting in 2018, so prioritizing those debt repayments may be beneficial.
- Charitable deductions should be made by December 31 if you already expect to itemize your deductions, because the higher threshold for itemized deductions in 2018 may make those donations less tax efficient.
- Medical expenses: If you typically benefit from the deduction for medical expenses, it may be advisable to accelerate costs where possible. The medical deductions are eliminated in the House version of the bill and expanded in the Senate version, but the higher standard deduction will make them harder to benefit from.
Year End Tax Planning – Business
- The proposal for a significant rate cut in future years means deferring income and accelerating deductions may be even more beneficial than usual. Businesses should consider any opportunities to do so prior to year end.
- Accelerate entertainment expenses. Both versions of the Tax Cuts and Jobs Act eliminate the 50% deduction for entertainment expenses. If you have entertainment expenses that can be accelerated, like season tickets to a sporting venue or team, you should consider prepaying the balance.
- Consider accelerating equipment purchases. 100% expensing of capital assets will be available under both versions of the Tax Cuts and Jobs Act starting September 27, 2017. If you expect to tax rate to be higher in 2017 than 2018, you should consider accelerating the purchases to achieve a larger benefit.
- Evaluate your capital structure to consider the impact of debt financing due to the new business interest expense deduction provisions.