2017 Year-End Tax Planning Guide
The changes in various tax provisions brought about with the 2012 Tax Act and 2015 Path Act, and proposed “Tax Cuts and Jobs Act” continue to make planning for 2017 and future years more complex and challenging. We created this tax planning guide to help you understand how these changes may affect you. Download our guide here.
The Current Environment
Congress is scheduled to adjourn for the year on Dec. 15, 2017. Major tax policy changes this year are being pushed by President Trump and the Republican Congress, but it is uncertain whether such tax reform as described below will be enacted or when.
Tax Cuts and Jobs Act
As of Nov 2, 2017, The Trump Administration and House of Representatives issued H.R. 1, “Tax Cuts and Jobs Act”. As expected, this Bill contains major tax policy changes. The day the Bill was issued, President Trump stated he wanted a final Bill on his desk (for signing) by Thanksgiving. As of the date of this publication, the Senate had not issued its response nor its version of the “Tax Cuts and Jobs Act”. The Bill is intended to become law for tax years beginning after 2017. The framework calls for dramatic tax cuts and simplification: lower individual tax rates under a four-bracket structure, nearly doubling the standard deduction, and a significant reduction in the corporate tax rate; along with changing the tax treatment of pass-throughs, expanding child and dependent incentives, and more. Both the alternative minimum tax and the federal estate tax would be eliminated. This Briefing presents a high-level overview of the GOP’s proposals.
If a tax reform package moves in Congress under the reconciliation rules, which require only a Senate majority, the tax cuts would likely have to sunset after 10 years. Treasury Secretary Steven Mnuchin said that the White House would prefer permanent tax reforms but “if we have it for 10 years, that’s better than nothing.”
Highlights from H.R. 1 “Tax Cuts and Jobs Act”
Under the United States Constitution, all tax legislation must originate in the House of Representatives. To that end, on Nov. 2, 2017, House Republicans released a tax reform Bill. The President’s goal is to have a Bill on his desk (for signature) by Thanksgiving. The Bill is intended to become law for tax years beginning after 2017. With Republicans controlling both the House and Senate, and now the White House, prospects for significant tax reform are stronger than they have been in years. Key provisions of the House bill include:
Proposed Changes to the Individual Income Tax
- Consolidates the current seven tax brackets into four with rates of 12 percent, 25 percent, 35 percent and 39.6 percent. Materially expands the income ranges per bracket.
- Capital gains – 0 percent capital gains bracket would apply to capital gains “below the 15 percent rate threshold” ($77,200 for a married couple, $38,600 for single). A 15 percent bracket would apply to gains below the 20 percent threshold ($479,000 for a married couple, $239,500 for single). Presumably, the 20 percent bracket remains in effect for capital gains in excess of these thresholds.
- Increases the standard deduction from $6,350 to $12,000 for singles; from $12,700 to $24,000 for married couples filing jointly; and from $9,350 to $18,000 for heads of households.
- Eliminates the personal exemption and creates a $300 non-refundable credit for dependents who are not children. Also, a family flexibility credit of $300 would be allowed with respect to the taxpayer (each spouse in the case of a joint return) who is neither a child nor a non-child dependent.
- Increases the Child Tax Credit to $1,600 per child, limits the refundability of the credit to $1,000, and raises the phase-out threshold for the Child Tax Credit for married households from $110,000 to $230,000; for single taxpayers from $75,000 to $115,000.
- Eliminates all itemized deductions except for: Property Taxes ($10,000 limit), mortgage interest deduction and the charitable contribution deduction. The deductibility of mortgage interest is based on debt not exceeding $500K for loans on a principal residence on or after 11.2.17. The deductibility of cash based charitable contributions rises from 50% of AGI to 60%. Download our Charitable Giving Guide here.
- Eliminates deduction for alimony payments. Also eliminates inclusion of income for recipient.
- Eliminates the individual alternative minimum tax (AMT). AMT credit carryforwards would be available for use 2019-2022.
- Revises excludable gain from sale of a principal residence including increasing time of use as the taxpayer’s principal residence.
- Simplification and Reform of Education Incentives – Three existing higher education tax credits would be consolidated into one enhanced credit. The provision would help simplify three similar, but not identical, tax benefits into a single, easy to understand credit.
Proposed Changes to Business Income Tax
- Reduces the corporate income tax rate from 35 percent to 20 percent (25 percent for personal service corporations).
- Eliminates the corporate alternative minimum tax (AMT).
- A portion of net income distributed by a pass-through entity may be treated as “business income” subject to a maximum rate of 25 percent The remaining portion of net business income would be treated as compensation and continue to be subject to ordinary individual income tax rates.
- Cost Recovery (Increased Expensing) – Allows the cost of capital investment (qualified property) to be fully and immediately deductible for such items acquired and placed in service after 9.27.17 and before 1.1.2023.
- Expansion of section 179 expensing – The small business expense limit would be increased to $5 million and the phase-out would be increased to $20 million.
- Interest expense – Limitation rules – Businesses with average gross receipts of $25 million or less would be exempt from the interest limitation rules. Businesses with average gross receipts of more than $25 million would be subject to the interest limitation rules – disallowance of a deduction for net interest expense in excess of 30 percent of the business’s adjusted taxable income.
- Modification of net operating loss deduction.
- Revision to like-kind exchanges – Real property only.
- Entertainment, etc. expenses – no deduction would be allowed.
- Repeal of employer-provided child care credit.
- Repeal of work opportunity tax credit.
- Eliminates the domestic production activities deduction (section 199) and all other business credits, except for the research and development credit.
- Creates a fully territorial tax system, exempting from U.S. tax 100 percent of dividends from foreign subsidiaries.
- Enacts a deemed repatriation of currently deferred foreign profits, at a tax rate of 8.75 percent for cash and cash-equivalent profits and 3.5 percent on other profits.
- Modifies all business income taxes to be border-adjustable, disallowing the deduction for purchases from nonresidents and exempting export profits and foreign-derived profits from taxation.
- Estate tax basic exclusion is doubled from $5 million (as of 2011) to $10 million, which is indexed for inflation. Furthermore, beginning after 2023, the estate and generation-skipping taxes are repealed while maintaining a beneficiary’s stepped-up basis in estate property.
- The Gift tax is lowered to a top rate of 35 percent and retains a basic exclusion amount of $10 million and an annual exclusion of $14,000 (as of 2017), also indexed for inflation.
- Termination of Private Activity Bonds
- Employers with 50 or more full-time employees were subject to the “employer shared responsibility provisions” in 2017. The penalty is applied if minimum essential coverage is not offered to 95 percent or more of their full-time employees, so large employers may need to assess their health plan offerings to maintain compliance.
- Employers with between 25 and 49 full-time employees will be subject to the “employer shared responsibility provisions” in 2017 with the 95 percent threshold applying immediately.
- Employers (both with 50-99 and 100 or more employees) who are subject to reporting requirements must report to the employee by Mar. 2, 2018. Reporting required to be furnished to the IRS must be filed by Feb. 28, 2018 (or March 31 if filed electronically).
- If the owner expects to be in the same or lower tax bracket in 2018 as they were in 2017, deferring income to 2018 and accelerating deductions in 2017 will cause some tax to be deferred.
- If the owner expects business income to increase in 2018, thereby putting the owner in a higher personal tax bracket for 2018, the business might consider accelerating income in 2017 and pay tax at the lower 2017 bracket, while deferring deductions to 2018 and offsetting income taxed at the higher 2018 bracket.
- If the corporation expects to be in the same or lower bracket in 2018, the corporation might defer income to 2018 and accelerate deductions in 2017.
- If the corporation expects to be in a higher bracket in 2018, the corporation might accelerate income in 2017 and defer deductions to 2018.
- 50 percent bonus depreciation allowance through 2017
- 40 percent in 2018
- 30 percent in 2019
- Research and Development Tax Credit was made permanent.
- New Markets Tax Credit extended through 2019.
- Work Opportunity Tax Credit extended through 2019.
- 15-Year Straight-Line Cost Recovery for Qualified Business Improvements was made permanent.
- Sec. 108(a)(1)(E), which excludes from gross income discharge of qualified principal residence indebtedness income.
- The Sec. 163(h)(3) treatment of mortgage insurance premiums as qualified residence interest, which permits a taxpayer whose income is below certain thresholds to deduct the cost of premiums on mortgage insurance purchased in connection with acquisition indebtedness on the taxpayer’s principal residence.
- Sec. 222, which provides an above-the-line deduction for qualified tuition and related expenses.
- Sec. 25C, which provides a 10% credit for qualified nonbusiness energy property. The law also updates the Energy Star requirements.
- Sec. 30B, which provides a credit for qualified fuel cell motor vehicles.
- Sec. 45L, which provides a credit for each qualified new energy-efficient home constructed by an eligible contractor and acquired by a person from the eligible contractor for use as a residence during the tax year.
Other Proposed Changes
Impact of the Tax Act of 2012 Tax Law Changes (for 2017)
Income tax rates
The Tax Act of 2012 imposed a new top tax rate of 39.6 percent. For 2017, top rate is imposed on taxable income in excess of $418,401 for single taxpayers, $444,551 for heads of household, and $470,701 for married taxpayers filing jointly ($235,351 for each married spouse filing separately).
Dividends and capital gains
A 20 percent tax rate applies to qualified dividends and long-term capital gains for taxpayers in the top income tax bracket, while the 15 percent rate is retained for taxpayers in the 25 percent through 35 percent brackets. A zero percent rate applies to taxpayers in the 10 percent through 15 percent brackets.
Itemized deduction and personal exemption phase-outs
The itemized deduction phase-out and personal exemption phase-out apply to taxpayers with Adjusted Gross Income (AGI) above $261,500 for single taxpayers, $287,650 for heads of household, $313,800 for married taxpayers filing jointly ($156,900 for each married spouse filing separately).
Additional hospital insurance tax on high-income taxpayers
The employee portion of the hospital insurance of the Federal Insurance Contributions Act (FICA), normally 1.45 percent of eligible wages and self-employment income, is increased by 0.9 percent on wages and self-employment income that exceed a threshold amount.
In the case of a joint tax return, the additional tax is imposed on the combined wages and self-employment income of both the taxpayer and the taxpayer’s spouse.
The threshold amount is $250,000 for a joint return or surviving spouse, $125,000 for a married individual filing a separate return, and $200,000 for all other filers.
Medicare tax on investment income
Since Jan. 1, 2013, Sec. 1411 of the Internal Revenue Code imposes a tax on individuals equal to 3.8 percent of the lesser of the individual’s net investment income1 for the year or the amount the individual’s Modified Adjusted Gross Income (MAGI) exceeds a threshold amount.
For estates and trusts, the tax equals 3.8 percent of the lesser of undistributed net investment income or AGI over the dollar amount at which the highest trust and estate tax bracket begins.
The threshold amount is $250,000 for married individuals filing a joint return and surviving spouses, $125,000 for married taxpayers filing separately, and $200,000 for other individuals.
Strategies to Consider
Annual year-end planning is most often focused on income taxes. Other considerations that should be reviewed and discussed with your advisor include:
Current asset allocations and portfolios
Work with your advisor to ensure that your allocation is aligned with your goals and time horizon for both your taxable and tax-deferred accounts. Make any adjustments as necessary.
Estate planning documents
Make sure your documents and beneficiary designations are still appropriate for your plans and goals, especially if you have had a recent life change – marriage, birth of a child, moved to a new state or had an increase in wealth.
Timing of income and deductions
Higher income tax rates and limitations on personal exemptions and itemized deductions merit a discussion with your tax advisor regarding the timing of income, including income type and deductions.
If you reached age 70½ in 2017, you will be required to take a minimum distribution from your traditional IRA by April 1, 2018. Keep in mind that if you wait until 2018 to take your first required minimum distribution, you will be required to take two required minimum distributions in 2018 (your first distribution that you chose to delay until April 2018, plus the required minimum distribution for 2018 distributed by December 31, 2018). If you were over age 70½ before 2017, you must take your 2017 required minimum distribution by December 31. If you are under 70½, consider converting some or all of your traditional IRA to a Roth IRA. Any decision on your retirement accounts should be based on your individual situation. A conversion can occur in one year or over several years.
The 2017 annual gift exclusion is $14,000 for direct gifts to individuals (i.e., cash, property, loan forgiveness). Gifts not subject to the annual gift exclusion include education costs and medical costs if the payment is made directly to the educational institution or medical provider. Taxpayers also have the highest lifetime gifting exemption in history this year. In 2017, you can gift $5.49 million (per individual) tax free either during your life or at death.
Dividend-paying assets (in taxable accounts)
Preferential treatment on qualified dividends still exists. The tax rate on qualified dividends (15 or 20 percent) is dependent on your income tax bracket. In addition, all dividends may be subject to the 3.8 percent Medicare Contribution Tax. Assuming it complements your financial goals, you may consider working with your advisor to rebalance your portfolio with less of an emphasis on dividend paying stocks.
Gains and losses in taxable accounts
Preferential treatment on long-term capital gains still exists. The tax rate on long-term capital gains (15 or 20 percent) is dependent on your income tax bracket. In addition, some gains may be subject to the new 3.8 percent Medicare Contribution Tax. If the investment analysis requires changes in taxable accounts, review possible gains and losses and the timing of such in tax years 2017 and 2018 in conjunction with the: 1) Individual income tax bracket, 2) Pease and Personal Exemption phase-outs, and 3) Medicare Tax on investment income.
Business Tax Strategies2
Affordable Health Care Act
The “employer shared responsibility” provision of the Affordable Health Care Act requires large employers to offer affordable health insurance that provides minimum value to all full-time employees. If such coverage is not provided, the employer will be assessed a penalty.
Defer or accelerate income and deductions
Defer or accelerate income and deductions
For pass-through entities such as sole proprietorships, S corporations, partnerships and LLCs, the owners’ share of income is taxed at personal income tax rates.
For C corporations, compare 2018 income and tax rates to 2017 income and rates.
Section 179 expensing
Section 179 allows businesses to expense part or all of the cost of new and used qualified property they acquire in the year when the assets are placed in service. There is an annual limit of $510,000 on the amount of expenses that can be deducted under Section 179 (in 2017).
Bonus depreciation allows businesses to claim additional first-year (or bonus) depreciation for eligible property acquired and placed in service in that year. In 2015, Congress passed the PATH Act, which included an extension of bonus depreciation through the end of 2019. However, the bonus depreciation allowance will be gradually phased out as follows:
Other tax credits
In addition to the Section 179 and bonus depreciation provisions, many other deductions and credits enjoyed in prior years have been extended or made permanent. The PATH Act of 2015 extended or made permanent the following provisions:
While a great many expiring tax provisions were extended in 2015 by the Protecting Americans from Tax Hikes (PATH) Act—some permanently—a few provisions were only extended through 2016 and have now expired. As of this writing, they have not been extended by Congress.
Individual tax incentives
The following provisions for individuals expired at the end of 2016 and are not available to taxpayers this year:
Energy tax incentives
Provisions for energy expenses that expired at the end of 2016 include:
1Net investment income is investment income reduced by deductions properly allocable to that income. Investment income includes income from interest, dividends, royalties, rents, and net gain from disposition of property (other than such income derived in the ordinary course of a trade or business). However, income from a trade or business that is a passive activity and from a trade or business of trading in financial instruments or commodities is included in investment income.
2Exclusive of H.R. 1
The information contained herein is for information purposes only, is not designed to address your financial situation or particular needs and does not constitute the rendering of tax or legal advice. You should consult with your tax advisor or attorney for advice pertinent to your personal situation.
Asset Allocation, Alternative Investment and Hedging/Diversification strategies are intended to mitigate the overall risk within your portfolio. Some strategies may be subject to a higher degree of market risk than others. An investor should understand the costs, cash flows and risks inherent in a strategy prior to making any investment decision. There are no guarantees that any strategy presented will perform as intended.
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