September typically marks the beginning of "tax planning season" for many clients, especially business owners, who are trying to get a handle on their upcoming tax obligations.  Below is some information about what you can expect in terms of tax planning and analysis.

First of all, tax planning or analysis is not tax preparation.

• Tax preparation gets the filing done.  The main goal is to make sure your tax reporting complies with both Federal and State tax laws.  It deals with historical information.
• Tax planning provides proactive tax advice.  It helps arrive at ways to minimize the amount of tax you must pay.
• A tax analysis takes planning to the next step.  Clients engage us for analysis to give them peace of mind.  An analysis, with proper assumptions and due diligence, should eliminate a nasty April 15th surprise.  It involves calculations of future taxes and is usually performed to provide a client with a schedule of tax payments to eliminate a tax-due situation and/or to avoid penalties and interest.  
• Scenario analysis takes tax analysis even further.  It is an iterative and laborious process of calculating and predicting the value of a set of situations, under a variety of different circumstances or scenarios. 

There is no such thing as a “typical” tax plan or analysis.  The list below provides examples why some clients contact us for tax planning:

• Sale of Rental Property or Residence
• Starting New Business
• Entity Change consideration (i.e., Sole Proprietorship vs. S Corporation)
• Ownership in Foreign Business
• Converting Traditional IRA to Roth
• Changing Jobs
• Change in Marital Status
• Estate Planning

How Much Does it Cost for you to Prepare a Tax Plan or Analysis?

The cost depends upon the level of effort and output you want.  The list is in order from least expensive to most expensive:

1. General information that can be delivered to you in a quick 5-minute phone call
2. General information, but you want it outlined in writing via email
3. Using supplied information from you, detailed calculations that answer your question(s) and provided to you in a quick 5-minute phone call
4. Using supplied information from you, detailed calculations that answer your question(s) and provided to you in report format and emailed to you and/or a consultation
5. Scenario analysis with a written report of findings and or a consultation

Because each situation is unique, currently we bill for tax planning and analysis on an hourly basis.  Our standard rate is $255 per hour.

For more information, contact us so we can get address your planning needs and peace of mind.

Another new tax law change:

The standard deduction for tax year 2018 almost doubled from 2017. With this increase, along with the changes to itemized deductions, the IRS predicts that more people will take the standard deduction.

On your personal tax return each year you have the choice of taking the standard deduction or itemizing your deductions. In almost all cases, you take the largest amount.

Standard deduction amounts for 2018

Single $12,000
Married Filing Jointly $24,000
Married Filing Separate $12,000
Head of Household $18,000

If you are 65 or over, blind, or disabled, you can add an additional $1,300 if married or $1,600 if unmarried.

Depending on your situation, you may save money on taxes or have a higher tax bill for 2018.  

The Tax Cuts and Jobs Act made sweeping changes that impact deductions and credits related to family and dependents.

Personal and Dependent Exemptions
In 2017,  you were allowed an exemption for yourself, your spouse and any eligible family members such as children. The amount was $4,050 per person in 2017. For a family of four, that was a $16,200 reduction in taxable income. Exemptions have been eliminated for tax year 2018. However some of the changes below may more than make up the difference.

Child Tax Credit 
If you have a qualifying child under the age of 17, you may be able to take a Child Tax Credit. While this credit is not new, there are major changes:

• The maximum credit increased from $1,000 to $2,000 per qualifying child. 
• The credit begins phasing out at $400,000 for couples and $200,000 for singles. 

Additional Child Tax Credit 
The maximum additional child tax credit increased to $1,400. This credit has income limits and is applied after the child tax credit.

Other Dependents 
If you have children or other dependents who do not qualify for the child tax credit, there is a new $500 family credit. These dependents include qualifying children or qualifying relatives, such as dependent children who are age 17 or older, or parents or other qualifying relatives that you support. To qualify the dependent must have no other income.

What does this mean?
For families with children over age 17, you might get a tax bite.  Additional taxes will  be paid by those families supporting siblings and/or parents.  But overall, young families will enjoy a reduction in tax.

It's been estimated that the number of people who itemize will fall by more than half in 2018 because of changes made by the Tax Cuts and Jobs Act (TCJA; P.L. 115-97, 12/22/2017). That's bad news for many charitable givers, but those who are age 70½ or older can continue to gain a tax benefit from their charitable contributions even if they don't itemize. The key is to make the gift by way of a qualified charitable distribution (QCD).
 
Charitable contributions may still be claimed as an itemized deduction, but the TCJA restricted itemized deductions for state and local income and property tax, tinkered with the deduction for residence interest (by reducing the dollar limit on acquisition debt and eliminating the deduction for interest on home equity debt), and did away with miscellaneous itemized deductions. It also nearly doubled the standard deduction. The net result is that charitable contributions won't yield any tax benefit for the many millions more Americans who will no longer itemize their deductions.
 
But the TCJA didn't touch one way for older individuals—specifically, those who are age 70½ or older and are receiving required minimum distributions (RMDs) from IRAs—to come out ahead tax-wise when they make a charitable contribution. The key is to make annual contributions by way of qualified charitable distributions from their IRAs, and to reduce RMDs by a commensurate amount.
 
Required minimum distributions. Taxpayers must start taking annual RMDs from their traditional IRAs by April 1 following the year in which they attain age 70½. (Code Sec. 401(a)(9) Failure to withdraw the annual RMD could expose the taxpayer to a penalty tax equal to 50% of the excess of the amount that should have been withdrawn over the amount actually withdrawn. (Code Sec. 4974) The first distribution year is the year in which the IRA owner attains age 70½, but that first distribution may be postponed until the second distribution year.
 
The amount of each RMD is calculated separately for each IRA. However, the RMD amounts for the separate IRAs may be totaled and the aggregated RMD amount may be paid out from any one or more of the IRA accounts. (Reg. § 1.408-8, Q&A 9) Each year's RMD is determined by a table percentage that varies with the taxpayer's age and is applied against his or her total IRA balance at the end of the preceding year.
 
Qualified charitable distributions. An annual exclusion from gross income (not to exceed $100,000) is available for otherwise taxable IRA distributions that are QCDs. (Code Sec. 408(d)(8)) Such distributions aren't included in gross income, can't be claimed as a deduction on the taxpayer's return, and aren't subject to the general percentage limitations that apply for making charitable contributions. Under Notice 2007-7, 2007-1 CB 395, even though a QCD from an IRA to a charity is not included in the taxpayer's gross income, it is taken into account in determining the owner's RMD for the year.
 
A qualified charitable distribution is one that is made

1. On or after the IRA owner attained age 70½ and
2. Directly by the IRA trustee to a Code Sec. 170(b)(1)(A) charitable organization (other than a Code Sec. 509(a)(3) organization or a donor advised fund (as defined in Code Sec. 4966(d)(2)).

 
Also, to be excludable from gross income, the distribution must be otherwise entirely deductible as a charitable contribution deduction under Code Sec. 170 without regard to the regular charitable deduction percentage limits.
 
Recommendation. Using qualified charitable distributions—instead of making charitable gifts from other sources—can result in meaningful tax savings for charitable-minded older taxpayers who are receiving RMDs and will not itemize their deductions. For 2018, that will be the case if total itemized deductions, including charitable contribution deductions, won't exceed $24,000 for joint filers, $18,000 for heads of household, and $12,000 for single filers (plus $1,300 for the elderly or blind, or $1,600 for a taxpayer who is unmarried and not a surviving spouse).
 
Illustration. Fred and Anne Able are both age 72 and will have $110,000 of adjusted gross income (AGI) for 2018, including $40,000 of RMDs that Fred is required to take from his IRAs. They will not be able to itemize deductions. Each year, they give a $2,000 check to their place of worship and another $1,000 to a children's hospital. If they make the same gifts this year by writing checks to these charities, their taxable income will be $83,400 ($110,000 minus $26,600 standard deduction) and their federal income tax bill will be $10,227. Alternatively, they can withdraw only $37,000 from Fred's IRAs, and make their $3,000 of charitable gifts via QCDs from those IRAs. This way, they will satisfy their charitable giving goals, meet Fred's RMD requirement, and reduce their taxable income to $80,400 ($107,000 minus $26,600 standard deduction). Their tax bill will be $9,567, or $660 less than doing things the usual way.
 
The higher the taxpayer's marginal tax bracket, the more tax dollars would be saved. For example, if joint filers have $320,000 of non-RMD gross income and $40,000 of RMDs, making a $3,000 QCD and reducing IRA withdrawals by a like amount would save $960 (32% of $3,000) in tax dollars.
 
Recommendation. Taxpayers interested in using QCDs to reduce their tax bills should defer taking RMDs—or defer taking the entire amount of the RMD—until near the end of the year or whenever else in the year that they know how much they will contribute to charity for the year. By doing so, they can know before taking any actual IRA distributions how much their RMD (and AGI, and taxable income) can be reduced by making QCDs for the year.
 
Caution. A QCD must be made directly by the IRA trustee to a charitable organization. Thus, a distribution made to an individual, and then rolled over to a charitable organization, is not excludable from gross income.
 
However, if a check from an IRA is made payable to a charitable organization, and delivered by the IRA owner to that organization, then the payment to the organization is treated as a direct payment made by the IRA trustee to the organization. (Notice 2007-7, Sec. IX, Q&A 41, 2007-5 IRB 395)
 
Can the strategy work for itemizers as well? The answer is "yes" if the age-70½-or-older taxpayer would be able to itemize even without claiming gifts to charity, and has high medical expenses. An amount (up to $100,000) paid out to a charity as a QCD instead of being received as a regular RMD reduces AGI and may qualify the taxpayer for a higher medical expense deduction. Under the TCJA, medical expenses can be claimed as an itemized deduction for 2018 only to the extent they exceed 7.5% of AGI (above 10% of AGI for 2019 and later). Additionally, the reduced AGI may help avoid or mitigate the effect of the 3.8% surtax on net investment income. This surtax is levied on the lesser of
 

1. Net investment income or
2. The excess of modified AGI over the threshold amount ($250,000 for joint filers or surviving spouses, $125,000 for marrieds filing separately, and $200,000 for other taxpayers). 

Many times, clients are surprised to find they must file a gift tax return, even when they don't owe gift or estate taxes.

The IRS can impose penalties for not filing a gift tax return, even when no tax was due.

You don’t owe gift taxes and aren’t likely to because of the lifetime estate and gift tax exclusion, so you don’t have file a gift tax return.  Right?  Wrong, in a number of instances.

You may need to file a gift tax return, even if you won’t owe gift or estate taxes.

For 2018, each individual can exempt up to $11,180,000 of property from Federal estate* and gift taxes. Married couples potentially can exclude twice that amount. There’s also the annual gift tax exclusion amount, which is $15,000 for 2018. You can make gifts up to $15,000 per beneficiary during the year, and those gifts won’t be included in your “taxable gifts” during the year. That means they won’t count against your lifetime exclusion amount. You can make these gifts to any number of people during the year, and there’s no lifetime limit.

When your annual gifts or even your entire estate are well below those levels, you still aren’t free from worry about filing gift tax returns. The IRS can impose penalties for not filing a gift tax return, even when no tax was due.

Gifts above the annual gift tax exclusion amount made during the year generally must be reported on Form 709. The gifts might not be taxed, because of the lifetime gift tax exclusion. But the gifts reduce the lifetime exclusion and must be reported so the IRS can track your use of the lifetime exclusion amount.

*Note:  The Washington estate exemption is quite lower ($2,193,000 for 2018).  For more information, contact us.

The new tax year is a true game-changer for taxpayers and their advisers, as many fundamental, decades-old tax rules have been repealed or suspended, with many new ones going into effect. This article, the second of a series, highlights the tax changes that apply in 2018 to individuals relating to deferred compensation, tax-preferred accounts, retirement plans, estate and gift taxes, capital assets and investments, and disaster losses.

New deferral election for stock grants of startups. Generally effective for stock attributable to options exercised or restricted stock units (RSUs) settled after Dec. 31, 2017, a qualified employee can elect to defer, for income tax purposes, recognition of the amount of income attributable to qualified stock transferred to the employee by a qualified employer. (Code Sec. 83(i)) The election applies only for income tax purposes; the application of FICA and FUTA is not affected. If the election is made, the income has to be included in the employee's income for the tax year that includes the earliest of five events, one of which is the first date on which any stock of the employer becomes readily tradable on an established securities market. (Code Sec. 83(i)(1)(B))

The new election applies for qualified stock of an eligible corporation. A corporation is treated as eligible for a tax year if:

1. No stock of the employer corporation (or any predecessor) is readily tradable on an established securities market during any preceding calendar year, and
2. The corporation has a written plan under which, in the calendar year, not less than 80% of all employees who provide services to the corporation in the US (or any US possession) are granted stock options, or restricted stock units (RSUs), with the same rights and privileges to receive qualified stock. (Code Sec. 83(i)(2)(C))

Detailed employer notice, withholding, and reporting requirements apply with regard to the election. (Code Sec. 83(i)(6))

ABLE account liberalizations. Effective for tax years beginning after Dec. 22, 2017, and before Jan. 1, 2026, after the overall limitation on contributions to ABLE accounts is reached (i.e., the annual gift tax exemption amount; for 2018, $15,000), an ABLE account's designated beneficiary can contribute an additional amount, up to the lesser of

1. The Federal poverty line for a one-person household; or
2. The individual's compensation for the tax year. (Code Sec. 529A(b))

Additionally, the designated beneficiary of an ABLE account can claim the saver's credit under Code Sec. 25B for contributions made to his or her ABLE account. (Code Sec. 25B(d)(1))

For distributions after Dec. 22, 2017, amounts from qualified tuition programs (QTPs, also known as 529 accounts) may be rolled over to an ABLE account without penalty, provided that the ABLE account is owned by the designated beneficiary of that 529 account, or a member of such designated beneficiary's family. (Code Sec. 529(c)(3)) Such rolled-over amounts are counted towards the overall limitation on amounts that can be contributed to an ABLE account within a tax year, and any amount rolled over in excess of this limitation is includible in the gross income of the distributee.

Expanded use of Sec. 529 accounts. For distributions after Dec. 31, 2017, "qualified higher education expenses" for purposes of the Code Sec. 529 rules, include tuition at an elementary or secondary public, private, or religious school, up to a $10,000 limit per tax year. (Code Sec. 529(c)(7))

Crackdown on recharacterizations. For tax years beginning after Dec. 31, 2017, the rule that allows a contribution to one type of IRA to be recharacterized as a contribution to the other type of IRA does not apply to a conversion contribution to a Roth IRA. Thus, recharacterization cannot be used to unwind a Roth conversion. (Code Sec. 408A(d))

Observation: Although the effective date for the provision eliminating the election to unwind such a conversion is stated as being for tax years beginning after Dec. 31, 2017, there has been some speculation among tax professionals that the ability to make such an election to unwind may be able to be made up to the date that a return is due. Simply put, the interpretation at issue is: does the effective date (i.e., before 2018) refer to the tax year when the recharacterization is made, or the tax year when the unwinding occurs?

Liberalized rules for awards to volunteers. For tax years beginning after Dec. 31, 2017, the aggregate amount of length of service awards that may accrue for a bona fide volunteer with respect to any year of service, is increased from $3,000 to $6,000. (Code Sec. 457(e))

Extended rollover period for plan loan offset amounts. For plan loan offset amounts which are treated as distributed in tax years beginning after Dec. 31, 2017, the period during which a qualified plan loan offset amount may be contributed to an eligible retirement plan as a rollover contribution is extended from 60 days after the date of the offset to the due date (including extensions) for filing the Federal income tax return for the tax year in which the plan loan offset occurs—that is, the tax year in which the amount is treated as distributed from the plan. A qualified plan loan offset amount is a plan loan offset amount that is treated as distributed from a qualified retirement plan, a Code Sec. 403(b) plan, or a governmental Code Sec. 457(b) plan solely by reason of the termination of the plan or the failure to meet the repayment terms of the loan because of the employee's separation from service, whether due to layoff, cessation of business, termination of employment, or otherwise. A loan offset amount is the amount by which an employee's account balance under the plan is reduced to repay a loan from the plan. (Code Sec. 402(c))

Estate & gift tax exemption increased. For estates of decedents dying and gifts made after Dec. 31, 2017 and before Jan. 1, 2026, the base estate and gift tax exemption amount is doubled from $5 million to $10 million. (Code Sec. 2010(c)(3)) The $10 million amount is indexed for inflation occurring after 2011 and is expected to be approximately $11.2 million in 2018 ($22.4 million per married couple).

New holding period requirement for carried interest. Effective for tax years beginning after Dec. 31, 2017, there's a 3-year holding period requirement in order for certain partnership interests received in connection with the performance of services to be taxed as long-term capital gain. (Code Sec. 1061) If the 3-year holding period is not met with respect to an applicable partnership interest held by the taxpayer, the taxpayer's gain will be treated as short-term gain taxed at ordinary income rates. (Code Sec. 1061(a))

Capital asset treatment barred for certain self-created property. Effective for dispositions after Dec. 31, 2017, the definition of a "capital asset" does not include patents, inventions, models or designs (whether or not patented), and secret formulas or processes, which are held either by the taxpayer who created the property or by a taxpayer with a substituted or transferred basis from the taxpayer who created the property (or for whom the property was created). (Code Sec. 1221(a)(3))

Like-kind exchange crackdown. Generally effective for transfers after Dec. 31, 2017, gain on like-kind exchanges is deferred only with respect to real property that is not held primarily for sale. However, under a transition rule, the prior-law like-kind exchange rules continue to apply to exchanges of personal property if the taxpayer has either disposed of the relinquished property or acquired the replacement property on or before Dec. 31, 2017. (Code Sec. 1031)

Repeal of rollover of publicly traded securities gain into specialized SBICs. For sales after Dec. 31, 2017, the tax-favored rollover under former Code Sec. 1033 of publicly traded securities gain into specialized SBICs is repealed.

Broadened incentives for Qualified Opportunity Zone investment. Effective on Dec. 22, 2017, a new rule provides temporary deferral of inclusion in gross income for capital gains reinvested in a qualified opportunity fund and the permanent exclusion of capital gains from the sale or exchange of an investment in the qualified opportunity fund. (Code Sec. 1400Z-2, as added by Act Sec. 13823)

Deductions for net disaster losses. For any tax year beginning after Dec. 31, 2017, and before Jan. 1, 2026, an individual's standard deduction is increased by the net disaster loss. (Tax Cuts and Jobs Act Sec. 11028(c)(1)(C)) Additionally, if any individual has a net disaster loss for any tax year beginning after Dec. 31, 2017 and before Jan. 1, 2026, the AMT adjustment for the standard deduction doesn't apply to the increase in the standard deduction that is attributable to the net disaster loss. (Tax Cuts and Jobs Act Sec. 11028(c)(1)(D))
​
A net disaster loss is the excess of

1. Qualified disaster-related personal casualty losses, over
2. Personal casualty gains.

"Qualified disaster-related personal casualty losses" are those described in Code Sec. 165(c)(3) that arise in a 2016 disaster area, namely any area with respect to which a major disaster was declared by the President under section 401 of the Robert T. Stafford Disaster Relief and Emergency Assistance Act during calendar year 2016. (Tax Cuts and Jobs Act Sec. 11028(a))

The new tax year is a true game-changer for taxpayers and their advisers, as many fundamental, decades-old tax rules have been repealed or suspended, with many new ones going into effect. This article, the first of a series, highlights the tax changes that apply in 2018 to individuals – tax rates, deductions, and credits.

Revised income tax rates and tax brackets. For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, seven tax rates apply for individuals: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. There are four tax rates for estates and trusts: 10%, 24%, 35%, and 37%. (Code Sec. 1(i))

Boosted standard deduction. For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the standard deduction is increased to $24,000 for married individuals filing a joint return, $18,000 for head-of-household filers, and $12,000 for all other taxpayers, adjusted for inflation in tax years beginning after 2018. No changes are made to the previously-existing additional standard deduction for the elderly and blind. (Code Sec. 63(c)(7))

Personal exemptions suspended. For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the deduction for personal exemptions is suspended—the exemption amount is reduced to zero. (Code Sec. 151(d))

Kiddie tax modified. For tax years beginning after Dec. 31, 2017, the taxable income of a child attributable to earned income is taxed under the rates for single individuals, and taxable income of a child attributable to net unearned income is taxed according to the brackets applicable to trusts and estates. This rule applies to the child's ordinary income and his or her income taxed at preferential rates. (Code Sec. 1(j)(4))

Floor beneath medical expense deduction lowered. For tax years beginning after Dec. 31, 2016 and ending before Jan. 1, 2019, for all taxpayers, medical expenses may be claimed as an itemized deduction to the extent they cumulatively exceed 7.5% of adjusted gross income. (Code Sec. 213(f)) In addition, the rule limiting the medical expense deduction for AMT purposes to the excess of 10% of AGI doesn't apply to tax years beginning after Dec. 31, 2016 and ending before Jan. 1, 2019. (Code Sec. 56(b)(1)(B))

State and local tax deduction limited. For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, itemized deductions for an individual's state or local taxes (as opposed to such taxes paid in connection with a Code Sec. 162 trade or business or in a Code Sec. 212 activity) are limited. The aggregate deduction for an individual's state and local real property taxes; state and local personal property taxes; state and local, and foreign, income, war profits, and excess profits taxes; and general sales taxes is limited to $10,000 ($5,000 for marrieds filing separately). The deduction for foreign real property taxes is completely eliminated unless paid or accrued in carrying on a trade or business or in an activity engaged in for profit. (Code Sec. 164(b)(6))

Crackdown on home mortgage and home equity interest. For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the deduction for interest on home equity debt is suspended, and the deduction for home acquisition mortgage interest is limited to underlying debt of up to $750,000 ($375,000 for married taxpayers filing separately). (Code Sec. 163(h)(3)(F)) The new lower limit doesn't apply to any acquisition debt incurred before Dec. 15, 2017. And, a taxpayer who entered into a binding written contract before Dec. 15, 2017 to close on the purchase of a principal residence before Jan. 1, 2018, and who buys the residence before Apr. 1, 2018, is treated as incurring acquisition debt before Dec. 15, 2017.
Prior law's $1 million/$500,000 limitations continue to apply to taxpayers who refinance existing qualified residence debt that was incurred before Dec. 15, 2017, so long as the debt resulting from the refinancing doesn't exceed the amount of the refinanced debt. (Code Sec. 163(h)(3)(F))

Boosted charitable contribution deduction limit. For contributions made in tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the 50% limitation under Code Sec. 170(b) for cash contributions to public charities and certain private foundations is increased to 60%. (Code Sec. 170(b)(1)(G)) Contributions exceeding the 60% limitation generally may be carried forward and deducted for up to five years, subject to the later year's ceiling.

No charitable deduction for college athletic seating rights. For contributions made in tax years beginning after Dec. 31, 2017, no charitable deduction is allowed for any payment to an institution of higher education in exchange for which the payor receives the right to buy tickets or seating at an athletic event. (Code Sec. 170(l))

Miscellaneous itemized deduction suspended. For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, there's no deduction for miscellaneous itemized deductions that are subject to the 2%-of-adjusted-gross-income (AGI) floor. (Code Sec. 67(g))

"Pease" limit on itemized deductions suspended. For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the "Pease limit" on itemized deductions is suspended. (Code Sec. 68(f)) Under this limit, the otherwise allowable amount of certain itemized deductions was reduced by 3% of the amount of a taxpayer's AGI exceeding a threshold amount; the total reduction couldn't be greater than 80% of all itemized deductions.

Other suspensions: The following exclusions and deductions don't apply for tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026:

• The exclusion from gross income and wages for qualified bicycle commuting reimbursements. (Code Sec. 132(f)(8))
• The exclusion for qualified moving expense reimbursements, except for members of the Armed Forces on active duty (and their spouses and dependents) who move pursuant to a military order and incident to a permanent change of station. (Code Sec. 132(g))
• The deduction for moving expenses, except for members of the Armed Forces on active duty who move pursuant to a military order and incident to a permanent change of station. (Code Sec. 217(k))

Additionally, for tax years beginning after Dec. 22, 2017, members of Congress cannot deduct living expenses when they are away from home. (Code Sec. 162(a))

AMT exemption amounts increased. For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the alternative minimum tax (AMT) exemption amounts for individuals are increased to be the following amounts:

• For joint returns and surviving spouses, $109,400.
• For single taxpayers, $70,300.
• For marrieds filing separately, $54,700. (Code Sec. 55(d)(4))

The above exemption amounts are reduced (not below zero) to an amount equal to 25% of the amount by which the taxpayer's alternative minimum taxable income (AMTI) exceeds the following increased phase-out amounts:

• For joint returns and surviving spouses, $1 million.
• For all other taxpayers (other than estates and trusts), $500,000.

Limited exclusion for student loans. For discharges of debt after Dec. 31, 2017 and before Jan. 1, 2026, the amount of certain student loans that are discharged on account of death or total and permanent disability of the student is excluded from gross income. (Code Sec. 108(f))

Child tax credit increased. For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the child tax credit is increased to $2,000. (Code Sec. 24(h)(2)) Other modifications to the child tax credit are:

• The income levels at which the credit phases out are increased to $400,000 for married taxpayers filing jointly ($200,000 for all other taxpayers) (not indexed for inflation).
• A $500 nonrefundable credit is provided for certain non-child dependents.
• The amount of the credit that is refundable is increased to $1,400 per qualifying child, and this amount is indexed for inflation, up to the base $2,000 base credit amount. The earned income threshold for the refundable portion of the credit is decreased from $3,000 to $2,500.
• No credit is allowed to a taxpayer with respect to any qualifying child unless the taxpayer provides the child's SSN. (Code Sec. 24(h))

​New excess business loss limitation. For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the excess farm loss limitation of former Code Sec. 461(j) doesn't apply, and instead a noncorporate taxpayer's "excess business loss" is disallowed. Under the new rule, excess business losses are not allowed for the tax year but are instead carried forward and treated as part of the taxpayer's net operating loss (NOL) carryforward in subsequent tax years. This limitation applies after the application of the Code Sec. 469 passive loss rules. (Code Sec. 461(l))

An excess business loss for the tax year is the excess of aggregate deductions of the taxpayer attributable to the taxpayer's trades and businesses, over the sum of aggregate gross income or gain of the taxpayer plus a threshold amount. The threshold amount for a tax year is $500,000 for married individuals filing jointly, and $250,000 for other individuals, with both amounts indexed for inflation. (Code Sec. 461(l)(3))
For a partnership or S corporation, the new rule applies at the partner- or shareholder-level.

Gambling loss limit modified. For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the limit on wagering losses under Code Sec. 165(d) is modified to provide that all deductions for expenses incurred in carrying out wagering transactions, and not just gambling losses, are limited to the extent of gambling winnings. (Code Sec. 165(d))

Deduction for personal casualty & theft losses suspended. For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, there's no itemized deduction for personal casualty and theft losses, except for personal casualty losses incurred in a Federally-declared disaster. (Code Sec. 165(h)(5)) However, where a taxpayer has personal casualty gains, the loss suspension doesn't apply to the extent that such loss doesn't exceed the gain.

​Congress is enacting the biggest tax reform law in thirty years, one that will make fundamental changes in the way you, your family and your business calculate your federal income tax bill, and the amount of federal tax you will pay. Since most of the changes will go into effect next year, there's still a narrow window of time before year-end to soften or avoid the impact of crackdowns and to best position yourself for the tax breaks that may be heading your way. Here's a quick rundown of last-minute moves you should think about making.
 
Lower tax rates coming. The Tax Cuts and Jobs Act will reduce tax rates for many taxpayers, effective for the 2018 tax year. Additionally, many businesses, including those operated as passthroughs, such as partnerships, may see their tax bills cut.
 
The general plan of action to take advantage of lower tax rates next year is to defer income into next year. Some possibilities follow:

• If you are about to convert a regular IRA to a Roth IRA, postpone your move until next year. That way you'll defer income from the conversion until next year and have it taxed at lower rates.

• Earlier this year, you may have already converted a regular IRA to a Roth IRA but now you question the wisdom of that move, as the tax on the conversion will be subject to a lower tax rate next year. You can unwind the conversion to the Roth IRA by doing a recharacterization-making a trustee-to-trustee transfer from the Roth to a regular IRA. This way, the original conversion to a Roth IRA will be cancelled out. But you must complete the recharacterization before year-end. Starting next year, you won't be able to use a recharacterization to unwind a regular-IRA-to-Roth-IRA conversion.

• If you run a business that renders services and operates on the cash basis, the income you earn isn't taxed until your clients or patients pay. So if you hold off on billings until next year-or until so late in the year that no payment will likely be received this year-you will likely succeed in deferring income until next year.

• If your business is on the accrual basis, deferral of income till next year is difficult but not impossible. For example, you might, with due regard to business considerations, be able to postpone completion of a last-minute job until 2018, or defer deliveries of merchandise until next year (if doing so won't upset your customers). Taking one or more of these steps would postpone your right to payment, and the income from the job or the merchandise, until next year. Keep in mind that the rules in this area are complex and may require a tax professional's input.

• The reduction or cancellation of debt generally results in taxable income to the debtor. So if you are planning to make a deal with creditors involving debt reduction, consider postponing action until January to defer any debt cancellation income into 2018.

 
Disappearing or reduced deductions, larger standard deduction. Beginning next year, the Tax Cuts and Jobs Act suspends or reduces many popular tax deductions in exchange for a larger standard deduction. Here's what you can do about this right now:

• Individuals (as opposed to businesses) will only be able to claim an itemized deduction of up to $10,000 ($5,000 for a married taxpayer filing a separate return) for the total of (1) state and local property taxes; and (2) state and local income taxes. To avoid this limitation, pay the last installment of estimated state and local taxes for 2017 no later than Dec. 31, 2017, rather than on the 2018 due date. But don't prepay in 2017 a state income tax bill that will be imposed next year - Congress says such a prepayment won't be deductible in 2017. However, Congress only forbade prepayments for state income taxes, not property taxes, so a prepayment on or before Dec. 31, 2017, of a 2018 property tax installment is apparently OK.

• The itemized deduction for charitable contributions won't be chopped. But because most other itemized deductions will be eliminated in exchange for a larger standard deduction (e.g., $24,000 for joint filers), charitable contributions after 2017 may not yield a tax benefit for many because they won't be able to itemize deductions. If you think you will fall in this category, consider accelerating some charitable giving into 2017.

• The new law temporarily boosts itemized deductions for medical expenses. For 2017 and 2018 these expenses can be claimed as itemized deductions to the extent they exceed a floor equal to 7.5% of your adjusted gross income (AGI). Before the new law, the floor was 10% of AGI, except for 2017 it was 7.5% of AGI for age-65-or-older taxpayers. But keep in mind that next year many individuals will have to claim the standard deduction because many itemized deductions have been eliminated. If you won't be able to itemize deductions after this year, but will be able to do so this year, consider accelerating "discretionary" medical expenses into this year. For example, before the end of the year, get new glasses or contacts, or see if you can squeeze in expensive dental work such as an implant.

 
Other year-end strategies. Here are some other last minute moves that can save tax dollars in view of the new tax law:

• The new law substantially increases the alternative minimum tax (AMT) exemption amount, beginning next year. There may be steps you can take now to take advantage of that increase. For example, the exercise of an incentive stock option (ISO) can result in AMT complications. So, if you hold any ISOs, it may be wise to postpone exercising them until next year. And, for various deductions, e.g., depreciation and the investment interest expense deduction, the deduction will be curtailed if you are subject to the AMT. If the higher 2018 AMT exemption means you won't be subject to the 2018 AMT, it may be worthwhile, via tax elections or postponed transactions, to push such deductions into 2018.

• Like-kind exchanges are a popular way to avoid current tax on the appreciation of an asset, but after Dec. 31, 2017, such swaps will be possible only if they involve real estate that isn't held primarily for sale. So if you are considering a like-kind swap of other types of property, do so before year-end. The new law says the old, far more liberal like-kind exchange rules will continue apply to exchanges of personal property if you either dispose of the relinquished property or acquire the replacement property on or before Dec. 31, 2017.

• For decades, businesses have been able to deduct 50% of the cost of entertainment directly related to or associated with the active conduct of a business. For example, if you take a client to a nightclub after a business meeting, you can deduct 50% of the cost if strict substantiation requirements are met. But under the new law, for amounts paid or incurred after Dec. 31, 2017, there's no deduction for such expenses. So if you've been thinking of entertaining clients and business associates, do so before year-end.

• Under current rules, alimony payments generally are an above-the line deduction for the payor and included in the income of the payee. Under the new law, alimony payments aren't deductible by the payor or includible in the income of the payee, generally effective for any divorce decree or separation agreement executed after 2017. So if you're in the middle of a divorce or separation agreement, and you'll wind up on the paying end, it would be worth your while to wrap things up before year end. On the other hand, if you'll wind up on the receiving end, it would be worth your while to wrap things up next year.

• The new law suspends the deduction for moving expenses after 2017 (except for certain members of the Armed Forces), and also suspends the tax-free reimbursement of employment-related moving expenses. So if you're in the midst of a job-related move, try to incur your deductible moving expenses before year-end, or if the move is connected with a new job and you're getting reimbursed by your new employer, press for a reimbursement to be made to you before year-end.

• Under current law, various employee business expenses, e.g., employee home office expenses, are deductible as itemized deductions if those expenses plus certain other expenses exceed 2% of adjusted gross income. The new law suspends the deduction for employee business expenses paid after 2017. So, we should determine whether paying additional employee business expenses in 2017, that you would otherwise pay in 2018, would provide you with an additional 2017 tax benefit. Also, now would be a good time to talk to your employer about changing your compensation arrangement-for example, your employer reimbursing you for the types of employee business expenses that you have been paying yourself up to now, and lowering your salary by an amount that approximates those expenses. In most cases, such reimbursements would not be subject to tax.

 
Keep in mind that we've described only some of the year-end moves that should be considered in light of the new tax law.  ​Please contact us for assistance so that we may help you arrange your business and financial affairs accordingly. We will be providing more details in the coming weeks regarding the implications of this legislative change.

How do the new tax laws impact me?

Anytime there are huge pieces of legislation, you can expect a 'technical corrections act' to come back and fix things.

The IRS will have its hands full just deciding which provisions require new regulations first.  They will need to get guidance out to practitioners, such as Accountability Services, as well as businesses very soon. 

We expect them to issue some guidance in the form of Q&As rather than full-blown regs, at least at the beginning. The transition provisions and effective dates will add tremendous complexity.

Frankly, our firm doesn't expect to have granular clarity until late spring, in many cases, after many of our clients' 2017 tax returns have been filed.

That being said, below is a revised checklist of things we suggest clients do by year-end.

• Push business income to 2018 (rates go down in 2018, plus deduction).
• Buy and place in service an electric car (tax credit expires at end of 2017).
• Recognize any possible business losses (they will be limited in 2018).
• Prepay investment expenses and tax prep fees in 2017 (nondeductible in 2018).
• Pay any moving expenses related to a job in 2017 (the deduction is eliminated in 2018).
• Sell any business processes or patents before the end of the year (this will be treated as ordinary income in 2018, and is capital gains in 2017).
• Wait to buy a business vehicle until 2018 (depreciation on luxury autos goes up substantially in 2018).
• Prepay 2017 state income taxes.
• Accelerate any of your children’s unearned income into 2017 (rates go up in 2018).

The decisions you make regarding your taxes impact your cash flow and bottom line - and the new tax laws are complicated.
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If you need tax consulting services over and above tax preparation, contact us to set your consultation appointment now and we'll get you on our calendar for late spring.

Individuals
 

1. Retirement Contributions.  The 2017 maximum 401(k) / 403(b) contributions are $18,000 and $24,000 if you’re over 50.  Pre-taxed contributions will lower your 2017 taxable income.  In contrast, Roth contributions won’t lower your taxable income, but will grow tax free!
2. Flexible Spending Account.  Keep in mind that these are “use it or lose it” benefits.  If you put funds aside tax-free, be sure to submit your paperwork by year-end.
3. Health Savings Account.  Self-only HSA accounts can be funded up to $3,400 and $4,400 if you’re over 50.  Family plans can put aside $6,750 / $7,750 for 2017.
4. Estate Planning.  If your estate is projected to be at risk of paying estate taxes, consider gifting by year-end.  For instance, the State of Washington's taxable estate starts at $2.129 million.  Be sure to discuss this with your attorney and/or CPA.
5. Charitable Donations – Tax free transfers for IRA owners over 70.  While IRA distributions are generally taxable, you can authorize a qualified charitable distribution (QCD) up to $100,000 be paid from your IRA tax free!
6. Charitable Donations – Stock.  The stock market has soared this year.  If your stock has appreciated, and you've owned it for longer than 12 months, you will get a bigger itemized deduction by donating the stock than by selling it and giving the cash.  Another benefit:  you will avoid paying capital gains tax on the sale.
7. Pay Estimated Tax.  The US tax system is a "pay-as-you-go" system. This means that you are required to pay income tax as you receive the money.  If you had a taxable windfall this year, to minimize interest and penalties, pay the tax in now.  If you’re not sure how much to pay, engage your accountant to perform a tax analysis.
8. Rebalance.  The stock market has gone gangbusters.  This is a good time to rebalance your investments.  Consider increasing future foreign investments and reducing US investments or vice versa.  Stock vs. bonds or CD is another consideration.  Whatever your risk tolerance, now is a good time to adjust for 2018.

 
Corporations
 

1. Reimbursements.  If you still have unreimbursed business expenses, submit an expense report so your company can get the tax deduction in 2017 (and you will get credited in 2017) for the expenses!
2. Healthcare Coverage.  If your company pays shareholder and/or employee healthcare premiums, be sure it’s recorded properly on your W-2.  If in doubt, address this matter with your payroll company before December 22.
3. Independent Contractors.  Your company is responsible for sending 1099s to certain vendors for whom your business paid $600+.  (This applies to owners of rental real estate.)  Form 1099 must be sent in January.  Now is a great time to check your file folder of vendor W-9s to ensure you have required information.
4. Equipment Purchases.  If your company needs a new server, truck, freezer, etc., consider buying the equipment before year-end.  These purchases could reduce your company’s taxable income!
5. Take Inventory.  If you sell products, conduct an inventory assessment and compare the results to your last inventory report.  Make any necessary adjustments to ensure you have an accurate account of how much capital you have wrapped-up in your current inventory.
6. Review Financial Statements.  Review your Profit & Loss Statement for accuracy.  Make sure Gross Revenue equals the same number(s) you reported to your state(s).  Review your 2016-2017 Balance Sheet accounts and question all negative numbers.  Question any numbers that did not change from 2016.  Invoice all customers for work performed and products shipped.  Review your AR and AP Aging and make efforts to collect what’s due and pay what’s owed.
7. Build / Finalize 2018 Budget.  Now that you’ve reviewed your 2017 financial statements, finalize your 2018 budget.

 
If you need assistance with your year-end activities, contact us!  Our TaxTeam provides federal, state and international tax advice -- from start-ups to multinational corporations at all stages of their life cycle. We carefully guide clients through complex tax rules and regulations and provide thoughtful and comprehensive solutions that help clients achieve their objectives.