As of the writing of this article, the House has passed their tax reform bill and the Senate has advanced their tax bill out of committee with a proposed vote after Thanksgiving. This whirlwind tax reform session will throw some turbulence into year-end tax planning. The Republicans have proposed cutting many deductions that have been around for ages, but also increase deductions by giving businesses the ability to expense purchases without the need to depreciate them. It is important for you to keep a watchful eye on the tax reform progress as it could have some fairly drastic tax changes not seen in decades. In any event, year-end tax planning can provide most taxpayers with a good way to lower a tax bill that will otherwise be waiting for them when they file their 2017 tax return in 2018. Since tax liability is primarily locked to each calendar tax year, once December 31, 2017 passes, your 2017 tax liability will be pretty much set in stone. Whether or not tax reform does pass, you should consult your qualified tax advisor before the end of the year to discuss your particular issues.
Typical year-end tax planning calls for deferring income and accelerating deductions. This would still be the plan if the tax reform proposals do not take effect until 2018. If there is tax reform for 2017 and 2018 you will need to review the changes and plan accordingly, which will likely still call for accelerating deductions and deferring income. If there is no tax reform at all, you will likely still want to defer income and accelerate deductions but be mindful of discussions taking place for tax reform that could come in 2018 and plan accordingly.
To defer income you can continue to hold appreciated assets, delay the issuance and receipt of bonuses, employ the use of installment payment contracts, utilize like kind exchanges, control debt forgiveness income, control issuance of invoices for payment, and make contributions to retirement plans.
To accelerate deductions, you can lump itemized deductions into 2017 and possibly plan for the standard deduction in 2018, pay bills in 2017, make last estimated state tax payment in 2017 if it does not create an alternative minimum tax issue, contribute to retirement plans, match passive income and passive loss, make charitable contributions, pay both installments of real property taxes, plan for alternative minimum tax issues, and purchase business equipment.
Another typical tax planning issue involves your capital transactions. Capital gains are an area ripe for end of the year planning as taxpayers can determine whether to buy or sell investments to either recognize a gain or loss. A popular strategy is to sell investments with built in losses in order to offset any capital gains a taxpayer had earlier in the year. However, if capital losses exceed capital gains for the year, taxpayers are only able to deduct up to $3,000 of the losses against ordinary income. Any net capital losses above $3,000 must be carried over and deducted in subsequent years. However, watch the wash sale rules if you plan on repurchasing the investment you just sold, which rules could prevent the recognition of the loss.
One notable tax reform rule you should consider is the proposed maximum 20% C corporation tax rate and the 25% tax rate on business income passed through from sole proprietorships, partnerships and S corporations. This potential opportunity should be watched carefully by all businesses, as the dynamics between traditional C-Corp tax and the pass-through business tax will be upended. Your business may need to change the way it is characterized for tax reasons to take advantage of these new business tax brackets if enacted.
Lastly, some estate planning issues should be considered such as making an annual exclusion gift of property of up to $14,000 per person per donee, contributing to a Section 529 Plan, making gifts of partnership interests or stock interests in companies. Even if Congress’ proposal to repeal the estate tax is enacted, a watchful eye still needs to be kept on what they do and when it will take effect and still plan accordingly.
As you are well aware, with or without tax reform, the tax laws will still be very complex for many taxpayers. Proper year-end tax planning takes into consideration a lot more than what has been highlighted or briefly discussed in this article. It is recommended that you seek professional tax advice before you undertake any personal or business transactions, and also seek the proper advice prior to year-end.
– Jason W. Harrel is a Partner at Calone & Harrel Law Group, LLP who concentrates his practice in all manners of Taxation, Real Estate Transactions, Corporate, Partnership and Limited Liability Company law matters. He is a certified specialist in Taxation. Mr. Harrel may be reached at 209-952-4545 or jwh@caloneandharrel.com
– Darren J. Pluth is an Associate at Calone & Harrel Law Group, LLP who concentrates his practice in all manners of Taxation. Mr. Pluth may be reached at 209-952-4545 or djp@caloneandharrel.com.