2017 YEAR-END. tax planning INDIVIDUALS. guide for

Transcription

1 2017 YEAR-END tax planning INDIVIDUALS guide for

2 year in review 2017 is unlike any previous tax year. Major congressional tax reform proposals that generally would go into effect in 2018 if signed into law are creating an aura of unprecedented uncertainty. Plan with these proposals in mind and remember this important tradeoff: Proposed legislation would generally reduce tax rates increase the income tax base The income tax base (the amount of income subject to tax) could go up because under the proposed legislation many tax breaks would be reduced or eliminated. If that happens, some people could wind up owing the same (or higher) tax liabilities next year. There are many differences between the House and Senate bills that need to be reconciled before any tax reform legislation can be signed into law. As a result, many of the details that you need to assess your tax situation for 2017 and 2018 remain unclear, including: When tax reforms might go into effect, What the 2018 tax brackets will be, and The extent to which certain deductions and credits might be reduced or eliminated. Answering these unknowns is critical in deciding when to recognize income and incur deductible expenses

3 year in review In many cases, individuals will decide to postpone recognizing certain income items until next year (when tax rates might be lower). Before year end, many people will also consider accelerating deductible expenses making additional charitable donations purchasing or selling investments to take advantage of today s tax breaks especially those that would be reduced or eliminated under tax reform proposals. Additionally, proposed tax law changes could possibly eliminate estate and generation-skipping taxes and/or significantly increase the lifetime gift and estate tax exemption. So, it s important to review your estate plan before year end. Our tax team doesn t have a crystal ball. For now, we re advising our clients to plan based on the current tax law. However, we re following tax, legislative and regulatory proposals, and we ll continue to let you know when major changes happen.

4 year in review Here s a brief summary of tax planning opportunities for you to consider before year end, as well as links to relevant blogs we ve posted in 2017 that provide more details on recent developments. As we go to press with this guide, there is still much uncertainty in tax law reform. Now more than ever, tax planning is critical to help reduce your overall income and estate tax burden. Planning the timing of income receipts and deductions, where possible, can have significant benefits, especially for expenses that may no longer be deductible in future years. - Laura Yalanis, CPA/MST- Shareholder, KLR Tax Services Group

5 taxes on income What Tax Rate Will You Pay on Your 2017 Income? Regular income tax rates apply to ordinary income. This includes: wages, selfemployment or business income, short-term capital gains, nonqualified dividends, interest and, generally, distributions from tax-deferred retirement accounts Regular Individual Income Tax Rates When tax planning at year end, focus on your marginal rate. That s the rate you ll pay on your next dollar of income. Your marginal rate depends on your income and your filing status Thresholds for the 39.6% Rate Single Head of Household Married Married Filing Separately $418,401 $444,551 $470,701 $235,351

6 taxes on income Alternative Minimum Tax (AMT) If you re subject to the AMT, your tax rate may be lower... 26% or 28%... but more of your income will be taxed because certain income items are treated differently, such as: Incentive stock option exercises Accelerated depreciation adjustments and related gains Tax-exempt interest on certain private-activity municipal bonds And certain deductions aren t allowed, such as: State and local income tax Property tax Home equity debt interest not used to improve your home Some miscellaneous itemized deductions You must pay the AMT if your AMT liability is higher than your regular income tax liability.

7 taxes on income How Will Tax Reform Affect You? Individual tax rates are a major difference between the current House and Senate tax reform bills. Although tax rates would be lower for most individuals, some taxpayers could be in a higher tax bracket next year if tax legislation is enacted. In addition, the Senate bill would lower taxes only temporarily. In 2025, today s tax rates and brackets would apply again, though the brackets would be adjusted based on inflation. The House bill would eliminate the confusing AMT, starting in However, the Senate version retains the AMT but increases the exemption amounts and phaseout thresholds, so fewer taxpayers would be subject to the AMT. Under either proposal, many high-income taxpayers would pay less federal income tax in the future. Another major provision would substantially increase the standard deduction Standard Deduction Single Married $6,350 $12, Proposed Standard Deduction with Inflation Adjustments Single Married $12,200 $24,400 Plus, taxpayers generally qualify for a $4,050 exemption for themselves and each of their dependents for 2017 (though an income-based phaseout applies). Starting in 2018, personal and dependent exemptions would be eliminated under the proposed legislation although child tax credits would be increased and subject to higher phaseout amounts. If the standard deduction increases, many taxpayers who previously itemized deductions would simply take the standard deduction in the future. But, remember, no tax reform has been signed into law as of this writing.

8 timing issues What Should You Accelerate (or Defer) This Year? The timing of when you recognize income, or incur deductible expenses, can have a big impact on your tax bill. Typically it s beneficial, to the extent possible, to defer income to the next year and accelerate expenses to the current year. This reduces your current year s tax bill. But if you expect to be in a higher tax bracket next year or tax rates to increase then it s generally better to do the opposite: accelerate income and defer deductions. Common Timing Strategies Income Items Bonuses Self-employment income Retirement plan distributions U.S. Treasury bill income Expenses Charitable contributions State and local income taxes Property taxes Mortgage interest Timing strategies can also help you avoid the AMT in 2017 or they could trigger it if you re not careful. Timing issues are especially critical in the face of proposed tax reforms. If enacted, the proposals would reduce or eliminate many itemized deductions and other tax breaks, starting as early as If that happens, maximizing these tax benefits in 2017 could lower your tax bill this year, without increasing your 2018 tax liability. In addition, the proposals are expected to lower tax rates for most individuals starting in If those changes are enacted, tax breaks taken today would generally be more valuable than tax breaks deferred until next year Year-End Tax Planning Guide

9 timing issues Adjusted Gross Income (AGI)-Based Reduction on Itemized Deductions If your AGI exceeds certain limits, your itemized deductions will be reduced for (Exceptions: deductions for investment interest, medical expenses and casualty, theft and wagering losses.) The size of the reduction depends on the extent to which your income exceeds the threshold. 80% is the maximum reduction in your deductions. AGI - Threshold for 2017 Itemized Deductions Single Head of Household Married Married Filing Separately $261,500 $287,650 $313,800 $156,900 If you re close to the threshold, deferring income might help you stay under it and protect your deductions. If you re above the threshold but might not be next year, you may be better off deferring deductible expenses. But, beware, many itemized deductions would be reduced or eliminated under congressional tax reform proposals. If that happens, you would lose out on any deferred amounts of the repealed deductions. On the plus side, the AGI-based reduction would also be eliminated under proposed tax reform legislation.

10 tax breaks for homeowners Are You Turning Big Expenses into Big Tax Savings? Under the current tax law, the biggest itemized deductions for many taxpayers are for home-related expenses. Mortgage Interest and Property Tax Deductions $1 million is the limit on the mortgage debt on which you can deduct interest on your principal residence and second home (combined) for $100,000 is the limit on the home equity debt on which you can deduct interest for 2017 regardless of how you used the debt. Beware: Interest on home equity debt not used to improve your home isn t deductible for AMT purposes. You can also deduct 100% of the property tax you pay on all of your homes for 2017 (unless you re subject to the AMT, under which state and local taxes like property tax aren t deductible). Proposed tax reform legislation would significantly scale back tax breaks for homeowners starting in Possible cutbacks could reduce or eliminate deductions for mortgage interest, interest on home equity debt, and property taxes. However, no tax reform legislation has been signed into law as of this writing. Nevertheless, before December 31, it may be advantageous to prepay your January mortgage and property tax bills due in early 2018 to maximize your itemized deductions for 2017.

11 tax breaks for homeowners Are You Turning Big Expenses into Big Tax Savings? Home Office Deduction If you use part of your home exclusively for business, you may be able to deduct actual expenses allocable to the space, including some that otherwise wouldn t be deductible, such as utilities and depreciation. Or you can use a simplified calculation of $5 per square foot up to a $1,500 maximum. Moving Expense Deduction If you moved for work or business reasons, you may be eligible to deduct your moving expenses for If you moved to a new state it s also important to familiarize yourself with the tax laws in your new home state and understand the requirements for filing a multistate tax return in Proposed legislation would repeal the home office deduction (except for the selfemployed), the exclusion of employer-reimbursed moving costs from income and, generally, the deduction for unreimbursed moving expenses starting in However, no tax reform legislation has been signed into law as of this writing.

12 tax breaks for homeowners Gain Exclusion on Home Sales If you sold your principal residence in 2017, you may be able to exclude from your taxable income all (or part) of the gain. Maximum Gain Exclusion Single Head of Household Married Married Filing Separately $250,000 $250,000 $500,000 $250,000 Various tests must be met to qualify for this break, and gain that s attributable to a period of nonqualified use of the home may be subject to capital gains tax. Any gain that isn t covered by the exclusion might be subject to the net investment income tax (NIIT) in addition to capital gains tax. If you re planning to sell a second home, consider making it your principal residence for a period long enough to qualify for the exclusion. Or, if it s a rental property and the sale is likely to generate a significant gain, consider a like-kind exchange. For 2018 and beyond, the required holding period for the home sale gain exclusion would be longer under proposed tax reform legislation. Additional restrictions would apply. However, no tax reform legislation has been signed into law as of this writing.

13 tax breaks for medical expenses Are You Using Tax Breaks to Combat Rising Health Care Costs? Health care costs are on the rise, causing many employers to cut back on healthcare benefits. In 2017, many taxpayers are paying more out-of-pocket for medical expenses than in previous years, often because premiums have increased and/or their plans have higher deductibles and co-payments. Fortunately, various tax breaks can help take the bite out of these increases. Medical Expense Deductions for % of AGI is the threshold for deducting medical expenses for most taxpayers Bunching these expenses into alternating years may get you past the threshold and maximize your tax savings. Under the House bill, the itemized deductions for medical expenses would be eliminated starting in But under the Senate bill, the deduction would be retained and the AGI threshold would drop to 7.5% for 2017 and Although no tax reform legislation has been signed into law as of this writing, consider maximizing elective medical spending in 2017, because this tax break might not be available next year.

14 tax breaks for medical expenses Health Savings Accounts (HSAs) and Health Care Flexible Spending Accounts (FSAs) Exceeding the AGI threshold for the medical expense deduction can be challenging for many taxpayers. Fortunately, HSAs and FSAs allow you to make pretax contributions and are used for tax-free funding of qualified medical expenses Contribution Limits $6,750 * $3,400 $2,600 * Additional rules and limits apply to these accounts. $1,000 Self Employed? Instead of making contributions to employer-provided HSAs and FSAs, selfemployed taxpayers who pay their own medical and dental insurance premiums can generally deduct those costs above the line. This can lower AGI, making it easier for the self-employed to exceed the AGI threshold for the medical expense deduction for Uninsured? Under the Affordable Care Act, for 2017, taxpayers without health insurance face penalties equal to the greater of: 2.5% of their income, or $695 per adult + $ per child. The maximum penalty is $2,085. Legislation has been proposed that would repeal the individual mandate. However, no tax reform legislation has been signed into law as of this writing.

15 charitable deductions Is Charitable Giving an Important Part of Your Tax Planning? and other donation-related breaks If you re charitably inclined, charitable giving can be one of the most powerful tools in your tax planning toolbox and this tax break is expected to survive congressional tax reform efforts and even possibly be expanded. You have complete control over when and how much you give. 100% of a donation to a qualified charity is generally deductible. But the charitable deduction is subject to an AGI-based reduction if your AGI exceeds the applicable threshold. And your annual deduction for qualified charitable donations is limited to 50% of your AGI. Lower limits may apply to certain donations. Beware of these limits and donation deadlines as you consider year-end charitable giving for In addition, if proposed changes cause you to take the standard deduction (rather than itemize deductions), you could lose out on this tax break starting in However, no tax reform legislation has been signed into law as of this writing. Substantiation Requirements For your donations to be deductible, you must properly substantiate them. Requirements depend on the type and amount of donation.

16 charitable deductions and other donation-related breaks Two Donation-Related Breaks to Consider for Donate Appreciated Securities Rather Than Cash Giving away publicly traded appreciated stock you ve held more than one year offers a double tax benefit: You can deduct the full fair market value of the stock. You avoid the capital gains tax you d owe if you sold the stock. But don t donate stock that has lost value. You ll enjoy a bigger tax benefit by selling the stock, recognizing the loss and donating the proceeds. 2. Qualified Charitable Contributions from IRAs $100,000 is the maximum amount you can transfer from your IRAs directly to qualified charities tax-free if you re age 70½ or older. $100,000 A rollover can help fulfill your required minimum distribution, and it s especially beneficial if the 50% of AGI limit would reduce your charitable deduction. When you make a qualified charitable distribution from your IRA, the income is excludable from AGI. The donation is not deductible on Schedule A. This can yield better tax results, especially for those who are subject to AGI-based reductions on itemized deductions, which include charitable donations.

17 tax planning for investments Are Taxes Taking Too Big a Bite Out of Your Returns? Tax planning for investments is a top priority for many individuals. Of course, there are many nontax factors you should consider before making investment decisions. But, timing gains and losses on sales can help minimize taxes for % is generally the long-term capital gains tax rate, but your rate is 20% if you re in the 39.6% ordinary income tax bracket. Short-term capital gains (gains on investments held for 12 months or less) and taxable interest income are taxed at ordinary income tax rates as high as 39.6%. You also may owe 3.8% NIIT. Taxes on Capital Gains 2017 Top Rate, Including NIIT Short-term gain 43.4% Most long-term gain 23.8% Long-term gain on collectibles, such as artwork and antiques Long-term gain attributable to certain recapture of prior depreciation on real property 31.8% 28.8% If your net capital losses exceed net capital gains, you re limited in how much loss you can deduct per year against ordinary income. The limits on deducting capital losses against ordinary income for 2017 are: for most taxpayers $3,000 $1,500 Loss carryovers can be a valuable tax saving tool. But they disappear once a taxpayer dies. for married taxpayers who file separately

18 tax planning for investments Passive Activities Do you materially participate in the businesses you re invested in? If not, beware of the passive activity rules. In general, losses from passive activities can only be taken against passive activity income. Unused passive losses can be carried forward until you earn other passive income or you sell an investment. Income from these types of activities involves some different considerations and planning strategies. Qualified Small Business Stock (QSBS) of the gain from the sale or exchange 100% of QSBS is tax-free, as long as: The QSBS was acquired on or after September 28, The QSBS was held for more than five years. To qualify as QSBS, the stock generally must have been issued by a C corporation that doesn t own assets worth more than $50 million and that s in an active trade or business. Additional rules apply. Qualified vs. Nonqualified Dividends Dividends are an important part of your return on investment. But not all dividends are created equal for tax purposes. There are two types of ordinary dividends: Nonqualified dividends are taxed at ordinary income rates. Qualified dividends are taxed at the more favorable long-term capital gains rates.

19 tax planning for investments Stock-Based Executive Compensation Many high net worth taxpayers earn stock-based executive compensation, including: Incentive stock options (ISOs) Nonqualified stock options (NQSOs) Restricted stock Special rules apply to stock-based compensation. Year-end planning can help you decide whether to exercise options and/or sell stock.

20 education planning Are You Taking Full Advantage of Tax-Advantaged Funding Options? Parents and grandparents worry about rising college costs. The College Board estimates that the annual cost for living on campus and attending a four-year university for ranged from: $20,090 for an instate public university $45,370 for a private university Fortunately, you can contribute money to various college savings programs. Contributions aren t deductible for federal tax purposes, but earnings accumulate tax-free if you follow the rules. College Savings Programs Annual Contribution Limits? Tax on Withdrawals? 529 Plans No, but you might owe gift tax on contributions over the $14,000 annual exclusion. No, if the money is used to pay for qualified college-related expenses. Coverdell Education Savings Accounts Subject to annual income limits, and only $2,000 can be contributed per child per year. No, if the money is used to pay for qualified education expenses, including primary and secondary school expenses.

21 education planning Education-Related Credits and Deductions The tax code also offers several tax breaks for higher education spending for you and your immediate family members. These breaks may be reduced or eliminated based on your modified adjusted gross income (MAGI) Tax Credits and Phaseouts for Higher Education Costs Annual Credit MAGI Phaseout Range for Joint Filers MAGI Phaseout Range for Other Filers Other Notable Rules American Opportunity 100% of the first $2,000 of education expenses; 25% of expenses between $2,000 and $4,000; maximum credit $2,500 per student Lifetime Learning 20% of the first $10,000 of qualified education expenses; maximum credit $2,000 per tax return $160,000-$180,000 $112,000-$132,000 $80,000-$90,000 $56,000-$66,000 Only for the first 4 years of higher education costs For higher education costs during or beyond the first 4 years Deduction for Qualified Higher Education Costs Under the House bill, the current structure of higher education credits would change. The Lifetime Learning credit would be eliminated, and the American Opportunity credit would be expanded by adding a 5th year with half the benefits. However, this change would make higher education tax credits unavailable to part-time students.

22 retirement planning Have You Maximized Your Contributions and Minimized Your Taxes? Traditional Retirement Accounts Employees may be eligible to make pretax contributions to various employersponsored retirement plans. Plus, these contributions can reduce your AGI and MAGI, which are the triggers for certain taxes and can cause the benefit of certain tax breaks to be reduced or eliminated. But there are limits to your annual contributions Limits for 401(k), 403(b) and 457 Plans Elective deferrals for people under age 50 at year end $18,000 Elective deferrals for people age 50 or older at year end $24,000 Defined contribution plan limit $54,000 Employees without retirement benefits and the self-employed: Consider a traditional IRA Contribution Limits for Traditional IRAs People under age 50 at year end $5,500 People age 50 or over at year end $6,500 In addition to contribution limits, the deduction for traditional IRA contributions is phased out if your MAGI exceeds certain levels. Traditional retirement accounts grow tax-deferred until withdrawn. So making the maximum contribution allowed by law is typically a good idea.

23 retirement planning Roth Accounts Contribute after-tax dollars to a Roth account now and take tax-free withdrawals later as long as your withdrawals are qualified. In 2017, the contribution limits are the same for traditional and Roth IRAs. (The limits apply on a combined basis, however.) Unfortunately, income-based limits may prevent higher-income taxpayers from contributing. If you re above the phaseout limit, consider a back door Roth IRA. A back door Roth IRA allows you to get around income limits by converting a traditional IRA into a Roth IRA. Retirement Plan Withdrawals You could owe penalties for withdrawing too soon or too little, depending on your age. Withdrawals are taxed at ordinary income tax not long-term capital gains rates. Plus, they could push you into a higher tax bracket and/or increase your MAGI enough to trigger the NIIT on some or all of your investment income. (Retirement plan withdrawals themselves aren t subject to the NIIT.)

24 planning across generations Can You Save Taxes by Transferring Assets to Family Members in 2017? Shifting income to children or grandchildren in a lower income tax bracket saves your family taxes as a whole. Specifically, consider transferring appreciated or income-producing assets to them before year end, so that tax on any gains (if an asset is sold) or income generated is subject to their rate which might be as low as 0%. Kiddie Tax Income shifting across generations works only for gifts to adults. Kiddie tax rules generally apply to: $2,100 is the threshold at which unearned kiddie income begins to be taxed at the parents marginal rate for Annual Gift Exclusion Children under age Full-time students under age $14,000 is the gift tax annual exclusion per recipient and donor for (The annual exclusion will increase to $15,000 in 2018.) Leverage your exclusions even further with gifts to a Section 529 education savings plan or Coverdell Education Savings Account. Gift, estate and generation-skipping transfer (GST) tax law would change significantly under proposed tax reform legislation. As of this writing, the House and Senate bills differ significantly in terms of the limits, timing and duration of the proposed changes. In general, if proposed legislation is enacted, many wealthy individuals would see their family s potential gift, estate and GST tax liability drop significantly.

25 share this guide HAVE YOU SET UP YOUR YEAR-END PLANNING MEETING? December 31 is an important tax deadline that you might not be aware of: With a few exceptions, it s the date by which most of your tax planning strategies must be implemented to reduce your 2017 tax bill. Contact our tax team to set up a meeting to brainstorm financial planning strategies to help you succeed in the future and minimize your tax obligations for With the possibility of major tax law changes pending, some tax breaks could disappear in 2018 or So, meeting with us before year end could be especially critical this year, depending on your business tax situation. ABOUT US KLR is one of New England s premier accounting and business advisory firms. With 250+ team members and offices in Boston, Newport, Providence, Shanghai and Waltham, KLR provides a wide range of services to both individuals and businesses. Find out why KLR is so much more than an accounting firm at KahnLitwin.com. SHARE OUR REPORT 888-KLR-8557 SO MUCH MORE THAN AN ACCOUNTING FIRM