The Tax Cuts and Jobs Act (the “Act”) that was recently passed by Congress and signed into law by the President calls for significant changes to the U.S. tax code. These changes will have a big impact on both individuals and businesses, with most provisions taking effect beginning January 1, 2018. Branscomb | PC will provide additional analysis of the impact of key provisions of the Act in the coming days. However, with limited time remaining before the 2017 year end, we first would like to address three tax planning actions that our clients should consider taking before the New Year.
Accelerate Your Charitable Contributions.
To claim a charitable deduction, a taxpayer must itemize his or her deductions. In a typical year, approximately 30% of Americans elect to itemize because their total itemized deductions exceed the standard deduction. The Act does not eliminate the charitable deduction, but the economic incentive to itemize after January 1, 2018 will shrink because the Act roughly doubles the standard deduction. Specifically, the standard deduction for single filers will increase from $6,350 to $12,000, and for married couples filing jointly, the standard deduction will increase from $12,700 to $24,000. If you anticipate not being able to itemize in future years, you may wish to increase your charitable giving before the end of 2017, while the charitable deduction remains available to you.
Even if you expect to continue to itemize in 2018 and beyond, there may be tax savings in accelerating your contributions to 2017 if you anticipate that your effective tax rate will go down in 2018. Furthermore, beginning January 1, 2018, taxpayers making contributions to colleges and universities as a precondition for purchasing seating at athletic events will no longer be able to deduct 80% of the value of those contributions. For that reason, you may wish to make any such contributions before the end of 2017 to take advantage of this expiring tax incentive.
Pay Your Property Taxes Now.
The Act provides that, beginning in 2018, taxpayers who itemize will only be able to write off up to $10,000 of the state and local taxes they pay in any year. This limitation applies to all taxes paid in 2018 and future years (including taxes paid for the year 2017). While most of the analysis of the impact of this change has focused on states with high state and local income taxes such as New York, New Jersey, and California, Texas has one of the highest property tax rates in the U.S., and many Texans’ property tax assessments each year exceed the $10,000 cap. Individuals in this position should consider paying their 2017 property taxes before year’s end despite the January 31, 2018 due date, in order to avoid the imposition of the $10,000 cap.
Individuals considering prepaying their 2018 property taxes before the end of 2017 should be aware that the IRS has recently issued guidance that a taxpayer may not take a deduction for a prepayment of property tax made in 2017 unless the tax has been assessed prior to 2018. So the IRS will disallow any prepaid 2018 property taxes reported as a deduction in 2017.
Defer Income Until 2018.
If it appears that your 2018 individual or corporate marginal tax rate will be lower than it was for 2017, consider whether you can postpone the recognition of any income until 2018. It is projected that 95% of individuals will have lower effective tax rates in 2018. Furthermore, the top marginal tax rate for C corporations is set to decrease from 35% to 21%, and many pass-through business entities (S corporations, partnerships, and most limited liability companies) may qualify for a 20% deduction starting in 2018. Of course, income from wages and salaries likely cannot be deferred until a later date, but other forms of income may be deferred in certain circumstances so that you may gain the advantage of the reduced tax rates that will be taking effect next year.
Of course, given the breadth and complexity of the new tax legislation, it would be impossible to address here every potential year-end planning opportunity that should be evaluated by individuals and businesses. If you would like to discuss year-end tax planning actions or other matters related to the new tax legislation, our Tax Group would be happy to assist you. Please do not hesitate to contact Casey F. Rickard in our Tax Group directly at (361) 886-3833 or at firstname.lastname@example.org to set up a time for a consultation.