Just because there is a very real possibility of tax reform this year doesn’t mean that efforts at year-end tax planning will be fruitless. Although it presents unique issues, it can be just as important to engage in planning this year, with the results of likely to be more effective than typical end-of-year planning.
For starters, there’s the usual “accelerate deductions and defer income” strategy, which generates the benefit of the time value of money. This year, with potentially huge reductions in tax rates between this year and 2018, and the possible loss of many deductions and credits under tax reform, it makes even more sense, according to Mark Luscombe, principal federal tax analyst for Wolters Kluwer Tax & Accounting.
“To a certain degree, planning now without knowing whether tax reform will be enacted would be the same – it’s just the urgency of the planning that is different,” he said. “In any year the time value of money makes postponing income and accelerating deductions favorable, but it’s particularly important this year,” he said.
If a taxpayer has an estimated income tax payment due in January, it might be a good idea to pay it in 2017, Luscombe advised. “And if the home equity interest deduction is going away, accelerate a little of that interest payment into 2017. Likewise property taxes, if they will exceed $19,000 in 2018, you might want to prepay it them in 2017. You can only prepay what you know is due – in states like Illinois you know what the first payment will be based on prior-year taxes. If a taxpayer would be taking the increased standard deduction next year, that’s all the more reason to prepay this year.”
Under both the Senate and House bills, the eligibility test for the exclusion of gain on the sale of a principal residence will go from two out of five years use as a principal residence to five out of eight years, Luscombe said. “If a house is pending a sale closing, it might be better to get it completed by the end of the year to avoid the five out of eight requirement. The moving expense deduction would be going away under tax reform, so if taxpayers anticipates a move, they should incur the expenses in 2017.”
“The pass-through provisions in the bills would affect sole proprietorships, partnerships and S corporation shareholder, so they might want to rethink how they want to operate their business,” Luscombe said.
“Estate planning would be affected because of the doubling of the exemption amount in both the House and Senate bills,” he said. “The House bill, unlike the Senate bill, would not repeal the estate tax but still requires planning for the immediate doubling of the exemption.”
Taxpayers contemplating recharacterizing a Roth conversion should consider doing so before year end, according to Luscombe. “They would normally have until Oct. 15, 2018, to recharacterize a Roth conversion that was done in 2017, but under the House proposal, there would no longer be the ability to recharacterize.”
The other usual year end strategies are still play, he indicated. “These include checking investments to determine what to sell to get the right gain-loss ratio, and bunching itemized deductions in one year and taking the standard deduction the next year. And the student loan interest deduction could disappear under the House proposal, so to the extent possible, pay some of it in 2017.”
More things to bear in mind
Luscombe noted that filing deadlines have been extended for certain areas qualifying for disaster relief. Those affected can carry back their casualty loss deduction to 2016, and have until Jan. 31, 2018, to file, although returns filed after Nov. 8, 2017, need to be filed on paper.
“Affected taxpayers can elect to add their loss to the standard deduction rather than itemize the deduction,” he said. “But the 2016 tax prep software didn’t contemplate the addition, so it will have to be modified for those claiming the deduction on their 2016 returns. Federal disaster relief is only affected by the three hurricanes [Harvey, Irma, and Maria]. It doesn’t yet include the California wildfires.”
“The new partnership audit rules become effective on Jan. 1, 2018,” Luscombe said. “This creates liability issues which partnerships should be addressing. Under the rules, the IRS audits the partnership itself rather than the partners, and the partnership is liable for any adjustments.”
This would affect current partners even though the year of audit goes back to before they joined the firm, according to Luscombe. “There needs to be an agreement as to who will bear the burden of those adjustments.”
“All of the Affordable Care Act is still law,” Luscombe observed. “The IRS has said it will not accept individual returns that don’t address the health care requirements of the ACA. This is the first year that they have done this.”
Although the final tax reform bill is likely to contain the Senate provision repealing the individual mandate, it would not be effective until after 2018.
Finally, Luscombe suggested a potential new source of revenue for accountants: entrepreneurs in the gig economy. “They need help with their taxes, and the IRS is starting to go after them for not keeping adequate records.”