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Strategies to Consider for Year-End Tax Planning

With a sweeping tax bill having passed the House, we will now see what happens when the Senate gets its hands on it.

One of the major features of the bill is a reduction of the top corporate income tax rate from 35% now to 20%. This rate only applies to “C” corporations, that is corporations that pay their own taxes, as opposed to the “S” corporation where the income tax liability is reported and paid directly by the shareholders, at the shareholders’ rates. So if you do have a C corporation, do everything you can to move income from 2017 into 2018. This could be done by waiting to send out year-end bills if you are a cash basis taxpayer, thereby moving receipt of the income into 2018. (This will not work with an accrual taxpayer. You might want to discuss this strategy with your tax preparation professional. They should know if there are opportunities here.)

For those who have pass-through entities, such as S corporations, LLC’s and partnerships, the top rate on these businesses is reduced to 25%, which for 2017 will still be 39.6%. So if you have a business which will qualify for the lower rate, as with the C corporation, do all you can to move income into next year and take advantage of as many business expenses this year. Unfortunately for some of us, like lawyers, this reduction does not apply. I don’t think it will apply to doctors or accountants either. If you are already in the 25% bracket or lower, this probably won’t help you much, although there are some lower rates at the bottom end as well which are phased in which may help you out in coming years.

For individuals, many of the Schedule A deductions are going away. Remaining are the charitable deduction, property tax deduction up to $10,000 per year, and mortgage interest but only up to $500,000. So if your mortgage is for $1 million (my condolences, unless of course your home is worth $2 million), then only 50% of your mortgage interest is deductible next year under the House bill. This makes it all the more attractive to pay down your mortgage, at least down to $500,000 if this provision takes effect. This is because, at a 39.6% income tax rate, with deductibility of your mortgage interest, a mortgage at 3.5% is actually only costing you the equivalent of 2.1%, due to the deductibility. Next year, your mortgage in excess of $500,000 will be costing you the full interest amount due to elimination of the deduction. If you have money earning less than 3.5%, you would be better off being your own bank and paying the mortgage down to $500,000 as soon as possible.

The state and local tax itemized deduction will be gone. We don’t have state tax in Nevada, but we do get the sales tax deduction if we itemize, and this will be gone next year as well. So if you are looking to buy a big ticket item, like maybe a new Lamborghini (that’s an expensive car on which you can write off the sales tax immediately even though you have taken out a 30 year program to pay it off) close the deal before year-end to get the sales tax deduction for the car on top of the normal deduction which everyone can take without itemization of purchases. This change in the law is designed to keep people in low tax states from effectively subsidizing those who live in high income tax states. Kind of makes sense to me, but I don’t live in Taxifornia.

No more tax credits for buying Teslas and other electric vehicles. Problem is, Elon Musk’s company is only putting out a small fraction of the vehicles that were supposed to be made. Might be hard actually getting one of those before year-end, and if you do, it will probably come at a premium price.

On the estate tax side, it looks like the lifetime exemption from the estate tax increases from $5.5 million to $11 million. And of course, between spouses, that’s $22 million you can leave to your deserving heirs without taking a tax haircut. Not bad. And by 2024 the estate tax is supposed to be gone. I’m not sure at this point about how that affects gifting (will there still be tax on gifts?) or how this affects tax basis (under current law, your tax basis for determining future capital gains on sale will be determined from the value of the property at the time of the person’s death).

So there you have it. It seems most of the planning right now is to take advantage of expiring exemptions before 2017 rings to a close.