Year-end tax planning with clients has been a staple in CPA practices for nearly as long as the tax code has been in effect. With all the discussion of the proposed tax bills, in all their iterations and negotiations, and the seemingly endless crystal ball commentary on their effects, many have questioned whether they should be doing anything special this year, anticipating a significant change in current law.
Two significant disclaimers: first, tax planning is by its very nature highly personal and individualized, and never conducive to generalization. For this reason, nothing in this article is meant or should be taken as general advice on actions any person should take immediately or over any given timeframe—it is merely meant to raise issues you may want to discuss with your tax advisor. Any actions you take with the hope of receiving a particular tax benefit should only be done after careful discussion with a qualified tax advisor who has full knowledge of your individual circumstances.
Second, as of the posting of this article, nobody can tell you what the “Tax Overhaul,” if any, will actually look like after it has gone through the sausage-making process. The House and Senate have each passed different bills, which are now being negotiated between the two. Some top-level details of a claimed deal have been released, but as with most things, the “devil is in the details.” And if the last six months have been any indication, what starts out as a sure thing often fails when the details come to light. For that reason, nothing you have heard is a done deal, and you need to understand that even the best thought-out strategy may end up being moot in the end.
With that said, below you will find a non-exclusive list of issues you may want to discuss with your personal tax advisor, should you so choose:
- Paying deductible expenses before year-end. To the extent tax planning has any axiomatic principles, one is to accelerate (pay sooner rather than later) any deductible expenses. Both bills have proposed changes to many personal itemized deductions (state and local income and property taxes, out of pocket medical expenses, mortgage interest, employee related business expenses, alimony, interest on student loans, teacher expenses, etc.). But even under current law, most (if not all) of these deductions are subject to exceptions and limitations that vary based on your specific situation, and few (if any) result in a dollar-for-dollar tax savings. Nevertheless, this is one area you may want to discuss in more detail with your advisors.
- Defer income. The corollary to the above is that advisors will generally tell you to defer receipt of income whenever possible. Depending on your circumstances, this advice may be even more relevant this year. Both bills propose a significant reduction in the corporate tax rate, as well as changes to the individual rate structure (and whether and to whom any potential benefit will accrue is still highly debated). Therefore, to the extent that you might be entitled to a year-end bonus or other payments that can be delayed by a month or two, especially if it is business income, doing so may (but by no means is there a guarantee) be beneficial. There are, however, specific rules relating to the timing of income recognition (for instance, for cash basis taxpayers the date you receive a check, not when you deposit it, controls when you must recognize the income). So again, a detailed conversation with your advisor not only about whether you should employ this strategy, but also how to employ it, is crucial.
- Like kind exchanges. There have been discussions surrounding the Congressional negotiations that the like kind exchanges with respect to personal property, such as airplanes, vehicles, and equipment may be eliminated. Consequently, if you have been considering using the current like kind exchange rules to replace any item of personal property, you should discuss with your advisor potential timing issues before acting.
- Carefully examine your estate plans. There are differences between the two bills presently being negotiated, ranging from complete repeal of the Estate tax, to an increased exemption. Therefore, if you are considering making a substantial gift (or dying), it may be advisable to hold off on doing so until the details of the any legislation (and actual passage thereof) come into clearer focus.
- Alternative minimum tax. Under both proposed bills, the alternative minimum tax (AMT) will be eliminated. To the extent that you have items that give rise to alternative minimum taxable income, it may be advisable to wait until next year.
- Business income & deductions. This is a mixed bag, although the proposed changes appear more advantageous than not. Under both bills, the corporate tax rates will be decreasing dramatically from a high of 35% to 20 or 21%. Likewise, it appears that pass through business owners may be given a tax break, as well. The changes in rates (to the extent they come to fruition) may create a stronger argument in favor of deferring income as much as possible.
Again, none of the above is absolute or written in stone at this stage, nor can the benefits of one strategy or another be determined without a careful examination of your individual facts and circumstances by a competent tax advisor. So, be wary of anyone offering you advice on a “sure-fire” strategy without at least knowing all your individual details.
If you want to discuss your circumstances in more detail, call the attorneys at Anderson & Jahde, P.C. to set up an appointment.