The Tax Cuts and Jobs Act (the “Act”)1 was passed by both houses of Congress on December 20, 2017 and was signed by the President on December 22, 2017. The Act was drafted and passed with great speed, with complex changes that affect nearly all those under U.S. federal tax jurisdiction. We are currently analyzing the provisions of the Act, as well as devising planning techniques so that our clients may obtain optimal tax results under the new regime. We will finalize our report in early January.
Due to the changes to take effect under the Act, we suggest the following year-end planning techniques to maximize tax savings before January 1, 2018. If after consulting with an accountant or tax advisor you decide that the recommendation is appropriate, please make sure to take action by December 31, 2017.
The state and local tax deductions will be capped at $10,000 starting in 2018.
We recommend accelerating payment of any unpaid 2017 state and local income taxes by December 31, 2017. In addition, property taxes related to 2018 may be prepaid (check with your local municipality if they will accept payment). Taxpayers subject to Alternative Minimum Tax (AMT) in 2017 may not be able to benefit from this strategy because the state and local taxes are added back under AMT. Additionally, on December 27, 2017, the IRS provided guidance that only a prepayment of anticipated real property taxes that have been assessed prior to 2018 are deductible in 2017. If the anticipated property taxes have not yet been assessed they cannot be deducted.
The standard deduction will increase from $6,350 to $12,000 for single filers (and from $12,700 to $24,000 for married joint filers). This means that if your itemized deductions do not exceed $12,000 in 2018, you will not be able to itemize.
We recommend making your intended 2018 charitable contribution and itemizing in 2017. If you are not sure which particular charity you would like to contribute to in 2018, consider donating to a donor advised fund (DAF) and then recommending a charity to the DAF in 2018.
Currently, pass-through income is subject to individual income tax rates and brackets. The new tax law adopts a 20% deduction for pass-through income (except for professional service providers) income of more than $157,500 if single, and $315,000 if married filing jointly.
Many taxpayers will find themselves in a lower tax bracket next year under the new provisions which creates an incentive to defer income when tax rates may be lower. Small business owners may consider deferring invoicing/billing.
Certain self-created intellectual property (e.g., patents, inventions, models or designs (whether or not patented), and secret formulas or processes) will no longer qualify as capital assets under the Act.
If you are planning to dispose of any intellectual property you personally created in the near future, consider booking the sale on or before December 31. If you have realized gains from the sale of stock (or other capital assets) earlier in the year, consider selling depreciated stocks (or other capital assets) to offset those gains. However, be sure to wait 31 days before repurchasing any such loss assets to avoid the “wash sale” rules.
A 529 Plan is an education savings plan operated through a state or educational institution for the purpose of helping families save for the future costs of college tuition, room, board, books and fees. The tax savings can be great as the funds grow tax-free and some states permit contributions to be tax deductible. The new law provides that a 529 Plan can also be used to pay for private schooling for grades K-12, not just college.
Consider funding a 529 Plan prior to year-end. Many states allow a tax deduction for funds contributed to a 529 Plan. Most state plans require that the contributions be received by December 31st. However, there are some plans that permit contributions to be postmarked by December 31st. You should speak to a financial advisor as soon as possible if you are interested in funding or adding to an existing plan before December 31st, 2017.
Starting in 2018, the new law doubles each individual’s estate and gift tax exemption from $5 million to $10 million (as indexed for inflation). In 2017, the exemption amount is $5.49 million. For 2018, an individual’s exemption is $11.2 million.
If you have gifted near the exemption amount of $5.49 million, do not make substantial additional gifts until 2018 in order to avoid potential gift tax liability.
DISCLAIMER: This article is not intended to provide legal advice, and no legal or business decision should be made based on its contents.
 While the bill is technically titled “An Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018”, this alert refers to the Act as the “Tax Cuts and Job Act” or the “Act”.