The House and Senate are now in process of finalizing tax reform. While the differences between the House and Senate tax bills have yet to be reconciled, the commonalities shared by both bills would suggest that if any tax reform bill is passed, it will mostly likely do the following:
- increase the standard deduction
- reduce individual tax rates
- reduce corporate tax rates
- eliminate many itemized deductions
Assuming these changes occur in 2018, what tax planning strategies should you be considering now?
- Pre-pay 2018 business expenses in 2017.
- If tax reform is likely to lower your expected tax rate in 2018, then business deductions in 2017 will be worth more than those same deductions taken in 2018. Therefore, determine if it may be beneficial to prepay 2018 business expenses in 2017.
- Defer 2017 income until 2018.
- Similarly, if you are able to control when you receive/recognize income, consider if you might benefit by deferring income until 2018, when your income may be subject to a lower business or individual tax rate.
- Maximize itemized deductions.
- Prepay 4th quarter estimated state income tax payments in 2017. If you are not subject to AMT, it may make sense to pay your 4th quarter estimated state income tax in December 2017, given that state income tax payments may no longer be deductible in 2018.
- Pre-fund 2018 charitable giving using a Donor Advised Fund (DAF). This would allow you to take the charitable deduction in 2017, presumably when your deduction would be more valuable or would otherwise not be recognized in 2018 with the higher standard deduction.
- Pre-pay 2018 Miscellaneous Itemized Deductions in 2017. Given that miscellaneous itemized deductions will likely not exist after 2017, it may be advisable (again, if you're not subject to AMT), to pay for as many miscellaneous itemized deductions in 2017 as possible. These deductions include: tax preparation fees, investment fees (including financial advisor fees), unreimbursed employee expenses, etc).
In summary, there may be significant tax planning opportunities in light of potential tax reform. You should discuss options with your financial planner and tax advisor about the benefits of pre-paying charitable contributions with a DAF, accelerating state tax payments, pre-paying miscellaneous deductions now, deferring income until 2018, and prepaying 2018 business expenses in 2017. In the event that tax reform does not pass, there do not seem to be many potential negative effects of pursuing these strategies, but be sure to seek professional advice to determine which strategies you can benefit from.