2017 Year-End Tax Planning for Individuals

Although tax planning is a 12-month activity, year end is traditionally the time to review tax strategies from the past and to revise them for the future. Year end has also become a time when there is an increasing need to take a careful look at what’s changed within the tax law itself since the beginning of the year. Opportunities and pitfalls within these recent changes – as they impact each taxpayer’s unique situation—should not be overlooked. This is particularly the case during year-end 2017. Here are some of the many consideration that taxpayers should review as year-end 2016 approaches.

Data, including 2016 return

Year-end planning should start with data collection and a review of prior year returns. This includes losses or other carryovers, estimated tax installments, and items that were unusual. Conversations about next year should include review of any plans for significant purchases or dispositions, as well as any possible life changes. Alternative minimum tax liability also needs to be explored as well as potential liability for the net investment income tax and the Additional Medicare Tax.

Investments

Taxpayers holding investments toward the end of the year, whether in the form of securities, real estate, collectibles, or other assets, often have an opportunity to reduce their overall tax bill by some strategic buying and selling (or like-kind exchanging). Balancing the existing tax rates within those considerations is part of that challenge: the ordinary income tax rates, the capital gain rates, the net investment income tax rate, and the alternative minimum tax (AMT), all play a role.

Income caps on benefits

Monitoring adjusted gross income (AGI) at year end can also pay dividends in qualifying for a number of tax benefits. Often tax savings can be realized by lowering income in one year at the expense of realizing a bit more in the other: in this case, either 2017 or 2018. Some of those tax benefits that get phased out depending upon the taxpayer’s AGI level include:

  • itemized deductions
  • personal exemptions
  • education savings bond interest exclusion
  • maximum child’s income on parent’s return (form 8814):
  • medical savings account adjustments
  • education credits
  • student loan interest deduction
  • adoption credits
  • maximum Roth IRA contributions
  • maximum IRA contributions for individuals

Life events

Life events such as marriage, birth or adoption of a child, a new job or the loss of a job, and retirement, all impact year-end tax planning. A change in filing status will affect tax liability. The possibility of significant changes and/ or significant or unusual items of income or loss should be part of a year-end tax strategy. Additionally, taxpayers need to take a look into the future, into 2017, and predict, if possible, any events that could trigger significant income, losses or deductions.

Retirement strategies

Taxpayers may want to take a look at a number of different provisions in anticipation of retirement, at the point of retirement, or after retirement. Many of these provisions have opportunities and deadlines associated with the concept of taxable year. Among others, these include contributions to employer plans, strategic use of IRAs and “required minimum distributions,” and timing Roth IRA conversions and reconversions to maximize your retirement nest egg.

Affordable Care Act compliance

The Affordable Care Act (ACA) imposes new requirements on individuals and tightens or eliminates some tax incentives. Year-end planning for individuals with regards to the ACA may generally be more prospective than retrospective but there are some year-end moves that may be valuable, particularly with health-related expenditures.  Note:  This might be under consideration, since the mandate was removed by the administration's new tax gift to the wealthy.

Acceleration or delay

Year-end tax planning, especially if done “at the eleventh hour,” requires some understanding of the timing rules: when income becomes taxable and when it may be deferred; and, likewise, when a deduction or credit is realized and when it may be deferred into next year or beyond.
Income acceleration/deferral. Taxpayers using the cash method basis of accounting can defer or accelerate income using a variety of strategies. These may include:

  • sell appreciated assets
  • receive bonuses before January
  • sell outstanding installment contracts
  • redeem U.S. Savings Bonds
  • accelerate debt forgiveness income
  • avoid mandatory like-kind exchange treatment

Deduction acceleration/deferral. A cash basis taxpayer generally deducts an expense in the year it is paid, although prepayment of an expense generally will not accelerate a deduction. There are exceptions, including those made in connection with:

  • January mortgage payment in December
  • tuition prepayment
  • estimated state taxes (for 2017 normally the 4th payment is made in January of the following year.  You can make these payments in December to increase your State estimates paid in 2017)

A New Administration

The new administration (I hate calling them this) is firmly in place, and their new tax reform bill has been signed and will take effect next year.  The biggest issues facing those of us in Blue States is the minimizing of deductibility of SALT (State and Local Tax) and Property Tax.  We will be limited to $10,000 total starting in 2018, so if you can, prepay your Property Taxes – look at your tax bill, and see how much you can pay this year before the 31st.  Your 4th Q estimate of SALT can be paid in December also.
Consider “bunching” your itemized deductions (not your business expenses if you are self-employed).  Since the standard deduction is doubled for 2018, it might be advantageous to go with that rather than itemize on your 2018 taxes, so perhaps contributing to Donor Advised Funds, like Fidelity, increasing your charitable donations into 2017, medical expenses, and other unreimbursed expenses (financial advisor fees, employment related expenses, etc) taken on your 2017 return might reduce your 2017 taxes, unless you are hit with the Alternative Minimum Tax.  The limits for the AMT go up for 2018 which is good, and the tax rates are reduced for 2018, so accelerating into 2017 is perhaps a good thing.  Also do not be confused about your business deductions – if you are self-employed, you will still be taking your business expenses against your business income next year, and most of you (my clients) will benefit from the new 20% deduction against this income (more on this as the rules solidify).

Please feel free to call our offices if you have any questions about how year-end tax planning might help you save taxes. Our tax laws operate largely within the confines of “the taxable year.” Once 2016 is over, tax savings that are specific to 2016 may be gone forever.

2017 Year-End Tax Planning for Businesses

As businesses approach year end, each has a unique opportunity to save additional taxes through taking a variety of strategic steps. Businesses seeking to maximize tax benefits through 2017 year-end tax planning may want to consider several general strategies, such as use of traditional timing techniques for income and deductions, and the role of the tax extenders (those made permanent and those expiring at the end of 2017), as well as strategies targeted specifically to their particular business.

As in past years, planning is uncertain because of the expiration of at least some popular but temporary tax breaks. Also added to the mix is the far-reaching Affordable Care Act (ACA) and whatever changes to 2017 the new Congress and Administration may make to the Tax Code.

Tax Law Changes

Changes to the tax laws in 2017 made by new IRS regulations and other guidance should also be considered in assessing year-end strategies for 2017. And year-end tax savings can be found in avoiding penalties, by knowing how to comply with some of the IRS’s news rules and regulations.

PATH Act “Extenders.” The Protecting Americans from Tax Hikes Act of 2015 (PATH Act), enacted at the end of 2015, made permanent many business-related provisions that had been up for renewal, including the 100-percent gain exclusion on qualified small business stock; the reduced, five-year recognition period for S corporation built-in gains tax; 15-year straight-line cost recovery for qualified leasehold improvements, restaurant property and retail improvements; charitable deductions for the contribution of food inventory and others. Perhaps most significant, especially for small businesses, enhancements starting in 2016 were added to both a permanently extended research credit and Code Sec. 179 expensing deduction.

Five-year Extensions. The PATH Act extended several business-related provisions available for five-years, under the expectation that general tax reform will consider a more permanent fate. Among these provisions, bonus depreciation and the Work Opportunity Credit have widespread applicability. Notably, in addition to extending bonus depreciation, a number of modifications have been made that:

  • reduce the bonus rate from 50 percent to 40 percent for property placed in service in 2018 and to 30 percent for property placed in service in 2019 (for 2016 and again for 2017 it remains at 50 percent);
  • replaces the bonus allowance for qualified leasehold improvement property with a bonus allowance for additions and improvements to the interior of any nonresidential real property, effective for property placed in service after 2015;
  • allows farmers to claim a 50 percent deduction in place of bonus depreciation on certain trees, vines, and plants in the year of planting or grafting rather than the placed-in-service year, effective for planting and grafting after 2015;
  • reduces the $8,000 bump-up in the first year luxury car depreciation cap for passenger automobiles on which bonus depreciation is claimed to $6,400 for passenger automobiles placed in service in 2018 and $4,800 for passenger automobiles placed in service in 2019, and only if the taxpayer does not generally elect out of bonus depreciation; and
  • extends long-term accounting method relief for bonus depreciation claimed on property placed in service in 2015 through 2019.

Expiring at Year-End 2016. A handful of business-related tax breaks did not fare well by the PATH Act, being extended only through 2016. Further extensions remain uncertain. 2016 year-end strategies therefore should include, where appropriate, the acceleration of expenses to maximize use of:

  • Film and TV production expense elections
  • Energy efficient commercial buildings deductions
  • Mine safety equipment expense elections
  • Additional depreciation for biofuel plant property

Revised Repair Regulations. The IRS issued final tangible property regulations (aka, the “repair regs”) over three years ago. They continue to control the accounting for costs to acquire, repair and improve tangible property. These “repair regs” impact virtually all asset-based businesses and have reverberated into 2016, with additional “clean-up” expected in 2017.

For 2017 year-end planning, qualifying for new safe harbors: a de minimis expensing safe harbor and a remodel-refresh safe harbor – both can yield substantial immediate deductions if followed.

Partnership Audit Rules. The Bipartisan Budget Act of 2015 (Budget Act) repealed the TEFRA unified partnership audit rules and replaces them with streamlined procedures. The Budget Act delayed the effective date of the new audit rules for returns filed for partnership tax years beginning after 2017. However, subject to certain exceptions, partnerships may choose to apply the new regime immediately to any partnership tax year beginning after November 2, 2015.

Business Use of Vehicles. Several year-end strategies for both business expense deductions for vehicles and the fringe-benefit use of vehicles by employees involve an awareness of certain rates and dollar caps that change annually. 2016 changes to the standard mileage rates and vehicle depreciation limits are critical to these strategies.

Affordable Care Act

Despite several delays and legislative tweaks, and despite what the administration says, the basic structure of the ACA for businesses, both large and small, generally remains intact. If an employer is an applicable large employer (ALE), this triggers employer shared responsibility provisions and the employer information reporting provisions. Small businesses, too, are not unaffected by the ACA and should take the ACA into account in year-end planning. Some incentives under the ACA, including health reimbursement arrangements and small business health care tax credits, can help maximize tax savings for small businesses. Information reporting under the ACA continues to challenge all businesses.

Revised Deadlines

The due date for filing partnership and C corporation returns was modified by the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015. Generally applicable to returns for tax years beginning after December 31, 2015, both Forms 1120-S and 1065 are due on or before the 15th day of the third month following the close of the tax year (March 15 for calendar-year taxpayers). The due date for the filing of Form 1120 by C corporations is changed to the 15th day of the fourth month following the close of the tax year (April 15 for calendar-year taxpayers).

Many taxpayers and tax professionals have long advocated for these changes to return due dates. These staggered due dates were recommended not only to enable taxpayers to receive Schedule K-1 information in time to meet their initial filing deadlines. They also help even out the workflow faced by tax preparers both in dealing with initial deadlines and with extensions. Further, the revisions are expected to contribute to a reduction in the need for extended and amended individual income tax returns.

These are just some of the considerations that make up year-end tax planning for businesses. Please feel free to contact our office so we can discuss specific 2017 year-end tax strategies that might be particularly worthwhile for your business.

Please remember that the due dates were changed for the filing of W2’s and 1099’s for calendar year 2016 and these dates are still cast in stone.  In the past, 1099’s and W-2’s were due to the individuals on January 31, and to the IRS at the end of February.  For calendar year 2016 and continuing on, the due dates for both individual and government filings is January 31.  This takes away the correction period, so it is a good idea to send the individuals and LLC’s their copies of 1099’s, and employee’s W-2’s early – mid January, so if there are changes to be made, they can be done timely.

We know that the election, and the new tax ruling, has made actual 2018 tax planning somewhat of a crystal-ball event.  If you have questions regarding this year, and tax planning, be sure to call the office – we can talk.  Much will change, but again, maybe not.  Who knows?????? When you come in for your appointment we can do some tax planning at that time.

So…best regards from the office.  See you soon!!!
Jadah