For accountants and tax professionals who have been waiting all year for some certainty on tax reform -- and whose clients have been badgering them for direction and planning advice -- Wednesday’s revelations about the compromises reached between the House and Senate reform proposals may offer some much-needed clarity.
While the final bill is not guaranteed to pass, it’s expected that Congress will vote next week on the deal reached on Wednesday, which resolves a lot of the differences between the two houses. That means tax professionals can begin offering clients some what-if planning advice based on the agreement.
For instance, the lower tax rates in the compromise bill offer scope for deferring income into next year. “I think you still rely on traditional year-end planning,” said Bill Smith, managing director of the National Tax Office of CBIZ MHM, “because overall it should be a tax cut, so you want to defer income and accelerate deductions because your deductions are going to come off at a higher rate this year than next year if the bill passes, and even if it doesn’t you have the deferral and then of course your income is going to be taxed at a higher rate this year than next year.”
“I’d say you want to think about prepayments and whether they will qualify, whether it’s insurance or paying your state and local income taxes,” he continued. “There’s a lot of discussion about whether you’re allowed to prepay 2018 state income tax in 2017. I don’t think that’s a really well-answered question, so it could be a risky position to take.”
Among the provisions that tax pros and their clients can begin planning around are:
- The corporate rate would drop to 21 percent.
- The top individual rate would drop to 37 percent (though it was not immediately clear if any changes would be made to the number of brackets).
- The bill would allow a $10,000 deduction for any kind of state and local tax, whether property, income or sales tax.
- The deduction for mortgage interest would be capped at $750,000 in debt. The corporate AMT would be scrapped.
(For more, see “The congressional deal on tax reform.”)
A final bonus of the newly visible scope of the proposed tax overhaul is that almost none of it would apply to the upcoming tax season.
“By and large all of the provisions apply for the tax year starting after Dec. 31, 2017,” said CBIZ MHM’s Smith. “There are a few, primarily the 100 percent expensing for qualifying assets placed in service after Sept. 27, assuming that’s still in the conference committee bill, but for the most part it’s going to affect 2018 taxes that will be reported on returns in 2019.”
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