Year-End Tax Planning for Individuals
Author: Brittany Cummings
Compared to previous year-end tax planning strategies, the recommendations for 2017 remain consistent. Tax planning opportunities continue to focus on deferring income and accelerating expenses as most taxpayers anticipate lower tax rates. The pending tax environment provides even more incentive and motivation to implement planning opportunities to potentially reap favorable tax benefits in 2018. Although the details of the Tax Cuts and Jobs Act of 2017 aren’t final, individuals should begin concurrent tax planning for 2018 and the remainder of 2017 as we await the results of potential tax reform.
Anticipated 2018 Tax Rates
While the projected House and Senate individual tax rates differ, both proposals would provide a new mix of taxpayers subject to the top individual tax rate due to the revised brackets. The tables below detail the proposed House and Senate tax rates and brackets:
Income Planning Strategies
Income Recognition Timing
Employees should consider discussing the timing of discretionary bonuses with their employers. If a bonus can be paid in the first quarter of 2018 instead of the close of 2017, taxpayers can potentially benefit from the lower tax rate in the later year. Individuals with stock options that allow for exercising the option between the vesting and expiration date generally include the difference between the stock’s fair market value and exercise price in ordinary income in the year the option is exercised. Exercising the option in 2018 may be more tax-friendly than doing so in 2017. Exercising stock options should be discussed with your tax and/or investment advisor, as your taxable income, current stock market conditions and other financial planning factors should be considered.
Defer or Recognize Capital Gains
Capital gains tax paid on the sale of certain assets held for more than one year, e.g., appreciated investment securities, will remain at 0, 15 or 20 percent; however, the applicable capital gains rate may change according to the tax brackets shown in the above tables.
Deferring asset sales to 2018 or later could provide for a favorable tax cost in comparison to recognizing the gain at the end of 2017. If pending sale agreements can’t be delayed, consider structuring these deals as installment sales to allow for gain recognition deferral into 2018 or later.
Deduction Planning Strategies
The potential decrease in individual income tax rates, significant increase in the standard deduction and repeal of personal exemptions would weaken the tax benefit of itemized deductions. The 2018 standard deductions under proposed tax legislation are shown below:
Both the House and Senate propose repealing or adjusting the treatment of most itemized deductions starting in 2018. With this in mind, taxpayers who traditionally itemize should consider accelerating these deductions. Consider paying property taxes normally deferred to January in December instead. If you’re planning for a new vehicle, home remodel, boat or other large purchase, consider accelerating this expense into 2017 to allow for an additional sales tax deduction (if opting to deduct sales tax instead of state and local income taxes). Accelerating deductions should be done with careful consideration given to the phase-out of itemized deductions for high-income taxpayers and the potential effect of state and local tax payments on your 2017 alternative minimum tax calculations.
Cash-basis taxpayers generally deduct business expenses in the year they’re paid and report income in the year it’s received. If you’re a cash-basis taxpayer who operates as a sole-proprietor, partnership or S corporation, tax planning should continue to include deferring income when feasible and accelerating deductions for 2017. The House and Senate proposals both include beneficial tax treatment for pass-through business income from most types of businesses. The House proposal accomplishes this through a reduced tax rate, while the Senate version provides a deduction.
In contrast to the above planning strategies, taxpayers with net operating losses may benefit from deferring expenses to 2018 while accelerating income into 2017, allowing for the offset of income taxed at current higher ordinary rates.
Affordable Care Act (ACA) Reminder
The IRS announced it won’t accept electronically filed returns for tax year 2017 that fail to address the health coverage reporting requirements under the ACA. Taxpayers must indicate whether they had coverage, had an exemption or will make a shared responsibility payment. Paper-filed returns that omit this information also may be suspended with any associated refunds delayed. To help expedite your tax return filing, be sure to provide this health coverage information to your tax preparer early in the 2018 filing season.
Although many individual taxpayers may see lower tax rates because of tax reform, some taxpayers may see an increased tax rate due to the condensed tax brackets and may need to reverse the tax planning strategies advised above.
The uncertain tax environment means taxpayers should be in frequent communication with their tax advisor, consider parallel 2017 and 2018 tax projections based on recent tax proposals and be prepared for continuous planning opportunities as we await final tax legislation.
Contact your trusted BKD advisor with questions or for more information.