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Year-End Tax Planning: Deductions a Target of Uncertainty in 2017
The House of Representative and the Senate has each approved its own version of tax reform. As the two legislative bodies reconcile the numerous differences in the respective bills, what does that mean for year-end tax planning? It may be prudent to take the approach that sweeping changes will take affect in 2018.
By Christopher C. Humes, CPA | Baker Tilly Virchow Krause LLP
The U.S. House of Representative has approved its tax reform legislation, and the Senate has approved its version. Nothing can go to the president to sign, however, until the two legislative bodies reconcile the numerous differences in their respective bills. It is also possible that these differences will not be resolved, and there won’t be new tax legislation taking effect in 2018.
What does that mean for your year-end tax planning? I believe it is prudent to take the approach that sweeping changes will take affect beginning in 2018. The potential changes provide planning opportunities, particularly where it comes to itemized deductions. This is an area where many taxpayers have the ability to manage.
Both tax cut bills would increase the standard deduction when filing to about $24,000 for joint filers and $12,000 for individuals. Both bills would repeal personal exemptions. For taxpayers who currently itemize deductions, both versions eliminate the deduction for state and local taxes. The House bill would retain the deduction for property taxes, but the Senate bill repeals the deduction. One planning opportunity for 2017 is to pay fourth quarter state and local tax estimates (and real estate taxes if possible) before Dec. 31 if you are not subject to the Alternative Minimum Tax (AMT) and you can itemize deductions.
The charitable contribution deduction is slightly modified, affecting few taxpayers in both versions. Many joint filing taxpayers who itemize fall in between the current $12,700 standard deduction and the proposed $24,000 standard deduction. A planning opportunity exists to make additional contributions before the end of 2017 to lock in a deduction this year, and then use the increased standard deduction for 2018. For upper income taxpayers who are subject to the AMT, the opposite strategy may be best, particularly for those who donate appreciated securities. The AMT is slated to be repealed in 2018 in both bills.
For many taxpayers, their home is their most valuable asset. The deduction for mortgage interest would be capped at $500,000 of indebtedness by the House, while the Senate version would retain the current $1 million cap of indebtedness in place. The key takeaway here is that the mortgage interest deduction will remain in place for most, but not all taxpayers.
The itemized deduction for medical expenses is significantly different in each bill: the House would repeal this deduction, while the Senate retains it. For taxpayers who have unreimbursed medical expenses exceeding 10 percent of adjusted gross income, 2017 may be the last year to take a medical expense deduction. For taxpayers who already have significant medical expenses, consider paying elective expenses before the end of 2017 for items such as eyeglasses, dental exams, and prescriptions.
There are differences in the new tax bracket proposals and the income thresholds for these brackets. The House version proposes four brackets, and the Senate version maintains seven brackets. Without digging into these specifically, the time-honored advice of deferring income where possible and maximizing retirement plan contributions remains an appropriate strategy for most taxpayers.
It is important to note that virtually no two taxpayers will be similarly affected by the changes proposed in these two tax bills. I see hundreds of tax returns each year, and no two are the same. That’s why it’s important to look at your individual situation and consider a planning discussion with your tax adviser now rather than later. While he or she may not yet have all of the answers to what the overall tax landscape will be, your adviser will be able to provide guidance as part of a continuous tax planning process that may save you a significant amount of taxes. The PICPA has a CPA Locator to help you find a CPA with the experience that matches your situation. I also recommend the PICPA consumer webpage which has a wealth of information on many topics that can guide you through various stages of your personal financial and tax life.
Christopher C. Humes, CPA, is a senior manager at Baker Tilly Virchow Krause LLP. He has more than 25 years of experience serving closely held businesses and individuals as a trusted business and personal tax adviser. He is a PICPA member and serves on the CPA Image Enhancement Committee.
