Tax Reform – Now What?

Tax Reform – Now What?

The House and Senate have approved a reconciled version of the tax bill, which will be signed into law shortly. Most of the changes become effective for tax years beginning on or after January 1, 2018, but expire after 2025.

Here are the details of the final tax agreement, according to highlights from the conference committee:

· Eliminates penalty under the Affordable Care Act for failing to have health insurance

· Lowers corporate tax rate from 35 percent to 21 percent (higher than the original 20 percent in the House and Senate bills)

· Reduces top effective marginal tax rate for S corporations to a top rate of 29.6 percent, allowing for a 20 percent tax deduction that applies to the first $315,000 of joint income earned by all S-corporations

· Eliminates corporate Alternative Minimum Tax (AMT)

·         Does NOT eliminate the individual AMT, but increases the exemption amount from the AMT for individuals so that fewer households will pay the AMT

·         Keeps seven individual tax brackets, although those brackets would generally decrease for all individuals, with a maximum rate of 37% (previously 39.6%).

· Continues to exempt the value of tuition waivers from taxes (the GOP had considered counting tuition waivers as income, and thus, taxable.)

· Increases the refundable portion of the child tax credit to $1,400, in response to Sen. Marco Rubio's insistence. The overall child tax credit will increase from $1,000 to $2,000.

· Roughly doubles the standard deduction, from $6,350 to $12,000 for individuals, and from $12,700 to $24,000 for married couples filing jointly

· Preserves the child adoption tax credit

· Allows individuals to write off the cost of state and local taxes, but only up to $10,000. Filers must choose to deduct sales tax, state income tax, or property taxes, instead of being able to deduct all local taxes.

· Preserves the mortgage interest deduction for all homeowners with existing mortgages, and for homeowners with new mortgages, the home mortgage interest deduction will be available up to $750,000

· Preserves the charitable deduction as-is

· Adds a deduction for up to 20% of “qualified business income.” (Also adds a lengthy and complicated definition of qualified business income)

 

With these changes, there are a few things that you can do in the remaining days of 2017 to permanently reduce your taxes.  Here are 3 suggestions:

1. Pre-pay your 2018 property taxes, if possible

Taxpayers who itemize their deductions may want to consider prepaying their 2018 property taxes before Dec. 31. Because the tax bill will cap the deduction for state and local taxes (SALT) at $10,000 starting next year, homeowners can maximize their SALT deductions in 2017 by prepaying next year's property taxes before Dec. 31.

2. Make bigger charitable donations

The GOP tax bill almost doubles the standard deduction to $12,000 for single people and $24,000 for married couples. That means taxpayers whose deductions fall below those caps won't be able to itemize starting in 2018.

Because of that, taxpayers may want to consider contributing more to charity in 2017 while they're more likely to be able to itemize their deductions. The value of those deductions will be greater this year compared with 2018, when many taxpayers will be pushed into a lower tax bracket under the new GOP provisions.

We always recommend accelerating deductions to the extent that you can. It is better to take a deduction now, against a 39.6 percent tax rate, rather than in 2018 with a 37 percent rate.

3. Defer income until 2018

Many taxpayers will find themselves in a lower tax bracket next year under the GOP provisions. For instance, married couples who earn a combined income of $80,000 will be in a 22 percent tax bracket next year, compared with 25 percent under the current law.

That creates an incentive to defer income until next year, when tax rates may be lower. Of course, that's not possible for those Americans who receive a paycheck every two weeks from their employers. But workers who expect year-end bonuses could talk with their employers about delaying payment until 2018. Likewise, contractors can ask clients to delay payment until after January 1, and small business owners can consider pushing their own income payouts into the new year.

Please call our office if you would like clarification on any of these items or further guidance on how to maximize the benefits!