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2017 Year-end Tax Planning Insights from Councilor, Buchanan & Mitchell (CBM)

As 2017 draws to a close, we want to provide the following ideas on reducing your 2017 income tax liabilities.  As you probably know, Congress is right now considering significant tax reform legislation. If and when legislation is enacted, we will send an update addressing the specifics. If there is no legislation passed, 2018 rules are similar to 2017.  These are our planning tips and summary of the changes affecting individuals and businesses.

To schedule a year-end tax planning consultation, please call Marcia Cohen at 301-986-0600 or e-mail her at mcohen@cbmcpa.com.

I. INDIVIDUAL TAXPAYERS

A. Retirement accounts

1. Individual retirement accounts (IRAs)

Traditional IRA: Anyone with earned income, or whose spouse has earned income, may make a contribution to a traditional IRA. The contribution limit for 2017 is $5,500; taxpayers age 50 or over by year-end may make an additional $1,000 “catch-up” contribution.  The contribution may not exceed the taxpayer’s earned income; or, if married, the combined earned income of taxpayer and spouse.

Whether contributions to a traditional IRA may be deducted depends on whether or not the taxpayer and/or the taxpayer’s spouse is covered by an employer retirement plan; and, if so, the amount of the taxpayer’s (and/or spouse’s) adjusted gross income. If the taxpayer is precluded from making a deductible contribution, he/she may choose to make a nondeductible contribution. This will serve to make earnings on those contributions tax-deferred; the contributions themselves will ultimately be withdrawn tax-free.

2017 contributions to a traditional IRA may be made up until the original due date of the 2017 return: April 17, 2018 with no extension.

Roth IRA: Contributions to Roth IRAs are nondeductible; and, provided that distributions are not taken until five years after a Roth account has been opened, and are taken after the taxpayer has turned 59 1/2, distributions are tax-free, not merely tax-deferred.  Contribution limits are the same as for traditional IRAs, reduced by any contributions that are made to traditional IRAs (i.e., the $5,500/$6,500 limit applies to contributions to both types of IRA in total), and the deadline for making contributions is the same. Eligibility for contributions to Roth IRAs is phased out for higher-income taxpayers.

Conversion of traditional IRA (or other retirement plan) to Roth IRA:  Some taxpayers may find that they and their families will receive a greater benefit from the long-term tax-free accumulation of funds in a Roth IRA than from the current tax savings of a traditional retirement plan. If that is the case, funds in a traditional IRA (including SEPs and SIMPLE IRAs), and in certain employer-sponsored retirement plans, may be converted to a Roth IRA. This conversion will result in current taxation of previously tax-deferred amounts in the converted account.  We suggest that you consult with us to determine whether the conversion makes sense for you, and to assess the current tax ramifications.

2. Employer-sponsored retirement plans

If you have not contributed the maximum to your employer retirement plan for 2017, you may be able to boost your contribution at year-end.  Maximum contribution limits for 2017 are as follows:

401(k), 403(a), 403(b) and 457 government plans: $18,000, plus an additional “catch-up” contribution of $6,000 allowed for taxpayers who are age 50 by year-end.

SIMPLE Plan $12,500, plus an additional “catch-up” contribution of $6,000 allowed for taxpayers who are age 50 by year-end.

3. Other notes on retirement plans:

Required Minimum Distributions: For 2017, taxpayers who have attained the age of 70 1/2 must take their required minimum distribution from IRAs or defined contribution plans (§ 401(k) plans, § 403(a) and § 403(b) annuity plans, and § 457(b) plans that are maintained by a governmental employer). The distribution must be taken by December 31. Taxpayers who turn 70 1/2 during 2017 may delay this initial distribution until April 1, 2018; however, this will require “doubling up” distributions for 2018, which may push the taxpayer into a higher income tax bracket.

Charitable contribution from IRA: A taxpayer who has reached age 70 1/2 may distribute to a qualified charity up to $100,000 per year from his or her IRA without recognizing income upon the distribution.  This may have an advantage over recognizing the income and claiming a charitable contribution deduction, due to the phase-out of itemized deductions as a result of increased income as well as income limitations placed on current deduction of charitable contributions based upon income levels.

 B. Timing of income and deductions

Key to minimizing tax liability is to avoid actions which might push you into a higher tax bracket. Thus, if you expect higher income in 2018 than in 2017, it may be advantageous to accelerate some of that income into 2017, or to defer some deductions into 2018.  Conversely, if you expect lower income in 2018, you may want to defer income or accelerate deductions.

If you own a business, and are on the cash basis of accounting, you can to some extent control your income by timing your billing.  You can also control the timing of expenses by determining when to pay your bills. There are limits to the deduction which may be claimed for prepaid business expenses; we can outline those rules for you.

Years for which income is low provide a good opportunity to take retirement plan distributions (not to be done without considering the sacrifice of future tax deferral), including conversions of traditional IRAs or other retirement assets to a Roth IRA.

If you expect to be in a higher tax bracket for 2017 than for 2018, it would be a good idea to accelerate itemized deductions into 2017.  You could make additional charitable contributions; prepay your January home mortgage payment so as to deduct the interest on that payment in 2017; or prepay your 4Q 2017 state estimated income tax payments, instead of waiting until the January due date.  Checks written and mailed in 2017, or credit card charges made in 2017, will count as 2017 deductions, even if the check is not cashed or the credit card bill is not paid until 2018. [Caveats: for taxpayers subject to alternative minimum tax for 2017, additional state income tax payments will yield no 2017 Federal tax benefit.  If you prepay your January mortgage payment, do so well ahead of year-end, so that lender will process the payment in 2017 and will reflect the extra interest paid on the Form 1098 issued to IRS.]

If a taxpayer has appreciated securities which have been held for more than one year, it may make sense to donate those to charity, instead of cash.  Deduction is allowed for the full value of the securities, and no gain is recognized by the taxpayer upon the donation.

C. Gifting

Making gifts to family members can serve two purposes: 1) moving income-generating investment assets to lower-income taxpayers, thereby reducing the income tax paid; and 2) removing assets from what will ultimately be the estate of the wealthier taxpayer, thereby reducing exposure to estate tax. A taxpayer may make gifts of up to the “annual exclusion amount” – $14,000 for 2017 – to each of as many individuals as he or she wishes.  A married couple can double that amount by “gift-splitting.”  To utilize the exclusion for 2017, the gift must be completed (i.e., check negotiated by recipient) by December 31.

 

 II. BUSINESS TAXPAYERS

Bonus depreciation and Section 179 expensing:

There are two provisions that permit current deduction of all or part of the cost of fixed assets used in a business:

Bonus Depreciation: For property acquired and placed in service during 2016 through 2019 (with an additional year for certain property with a longer production period), the bonus depreciation percentage is 50% for property placed in service during 2016 and 2017, with a phase down to 40% in 2018, and to 30% in 2019.  Bonus depreciation is the default treatment for asset acquisitions; the taxpayer must make an election OUT of such treatment if he prefers not to claim the bonus amount.

Section 179 deduction: The Section 179 election allows small business taxpayers to expense (i.e., currently deduct) otherwise depreciable business property, including computer software and certain qualified real property. Air conditioning and heating units placed in service during tax years beginning in or after 2016 are eligible for this deduction. You may elect to expense up to $510,000 of eligible asset acquisitions in 2017; eligibility for the deduction is phased out if asset acquisitions for 2017 exceed $2,030,000. The amount of the deduction is limited to business income, i.e., the deduction may not be used to create or increase a loss.

Home office

Expenses attributable to using a portion of your home regularly and exclusively as: (1) the taxpayer’s principal place of business: (2) a place where patients, clients, or customers regularly meet or deal with the taxpayer in the normal course of business; or (3) in the case of a separate structure not attached to the residence, in connection with a trade or business.  Please call us if you would like to discuss.

Health insurance for the self-employed

Self-employed individuals may claim a deduction for 100% of the amount paid for medical insurance premiums for themselves, their spouses and dependents.  This is not subject to the limitations on deduction of medical expenses generally.  Self-employed taxpayers may also count as health insurance and deduct premiums paid for long-term care insurance.

III. ON THE HORIZON

We list here some significant items from the legislation currently before Congress:

  • Lowering of corporate income tax rate from 35% to 20 – 22%
  • Lowering of the top individual income tax rate for individuals from 39.6% to perhaps 37%
  • Elimination or significant curtailment of the deduction for state income taxes and real estate taxes
  • Reduction of the amount of home mortgage debt on which interest may be deducted
  • Elimination of the deduction of alimony for post-2017 divorce agreements
  • Elimination of certain “miscellaneous” itemized deductions
  • Modifications to the alternative minimum tax regime for individuals, so that fewer taxpayers will be subject to it
  • Lengthening the time during which a homeowner must maintain a principal residence to allow exclusion of gain

If you have any questions, please do not hesitate to call. We will be happy to discuss with you these and any other tax planning ideas that may be applicable to your situation.

Councilor, Buchanan & Mitchell (CBM) is a professional services firm delivering tax, accounting and business advisory expertise throughout the Mid-Atlantic region from offices in Bethesda, MD and Washington, DC.