Here are some observations on the new tax law. These are things that clients can do to better comply with or make the most of the new rules.
1. “Bunching” Deductions Under the new higher standard deduction, with more limits on itemized deductions, consider focusing your deductions in every other year. This doesn’t work for every client, but for some who’s new itemized deduction total will be near the standard deduction amount, this can be a good plan. For example, in even years, pay two years of charitables (to the extent you can), pay two years of home property taxes (one in January and one in December, for example), and/or schedule pricey medical or dental procedures. In the odd years, plan on claiming the standard deduction.
2. Mortgage Interest
a. A tax deduction is not allowed for home equity debt beginning in 2018 unless the amount was used for a purchase, construction, or improvement of a residence. No debt from 2017 is grandfathered. So if you took money from a home equity line debt to buy a car, boat, pay off credit cards, etc., you should expect that this interest is no longer deductible. If you used part of the debt to improve the residence, you should be prepared to identify which part of the debt will qualify. You should consider retiring non-deductible debt as soon as you can.
b. The total acquisition debt on a first and second home for an interest deduction is limited to $750,000. If you buy a house after 12/15/2017 and owe more than this on your first and second homes combined, consider paying down the mortgage to get it under this cap. Mortgages in place on 12/15/2017 remain subject to the old rules.
3. Medical Deductions are allowed in 2017 and 2018 to the extent they exceed 7.5% of adjusted gross income. After 2018, the old rule of 10% returns. So consider medical and dental procedures to be complete and paid for by the end of 2018, to the extent that you can.
4. Property Taxes for 2018 should be prepaid by 12/31/2017 if you expect your total state and local taxes to be more than $10,000 per year. The only negative to this plan is that a deduction for accelerating the payment into 2017 might be defeated by the alternative minimum tax. But if you aren’t subject to the AMT, this plan works.
5. Alimony paid remains a deduction, and alimony collection remains taxable income, for divorce or separation instruments executed through 12/31/2018. Thus, if you have an existing alimony arrangement, and do not like this result, have it substantially modified after 12/31/2018 and the new rules will apply – alimony paid will not be deductible, and alimony received will not be taxable income.
6. Moving Expense reimbursements are taxable income beginning in 2018. So seek payment by your employer by 12/31/2017 for a move in process. Moving expenses are not deductible beginning in 2018. Thus, pay for your move in the process by 12/31/2017.
7. Athletic Contributions Pay your 2018 (or more) Wolfpack Club, Ram’s Club, and similar contribution by 12/31/2017. Right now, they are 80% deductible if they convey seating, ticketing, or parking rights. After 12/31/2017, they become completely non-deductible.
1. Businesses who prefer to use the cash method of accounting but are forced to use the accrual method based on their gross receipts should meet with us to see if they can change back to the cash method under more generous new rules.
2. Get rid of accounts called “meals and entertainment.” Meals remain 50% deductible but entertainment is no longer deductible in 2018. Need to use separate accounts for these going forward.
3. The deduction for qualified business income beginning in 2018 might require some re-thinking of your business structure. Once the dust settles on this a bit, consult with us to see if you are in the best position to benefit from this rule.
4. You might want to wait until next year to purchase the business auto. Next year’s depreciation rules are much more favorable.
5. Thinking of trading business or investment property other than real estate, like vehicles or artwork? Get it done by 12/31/2017 because you cannot defer a trading gain on these assets after this date.
6. Large (over $25 million gross receipts) and leveraged businesses should be concerned that not all of their interest expense will be deductible. Sit down with us to project if this will be a problem.
7. If you can generate or increase a net operating loss (“NOL”) for 2017, it might be a good idea. NOLs from 2017 can be carried back to past profitable years and get money back now, but NOLs in the future will not have that option.