The weather in Pennsylvania finally feels like fall, instead of endless summer. Once the weather changes and the leaves begin to change color, it is easy to turn our attention to all the wonderful things about fall. Halloween comes with Thanksgiving not too far behind. Then, all too soon the holidays are hear and we are making our New Year’s resolutions.
From a financial perspective, the end of the year is the perfect time for tax planning. We look to see if there are any losses that our clients’ can harvest, or any charitable contributions they can make, and we review the overall financial picture in an effort to avoid big surprises at tax time.
This year is a little different.
President Trump and Congressional Republicans took the next step in trying to enact a series of tax reforms by releasing their latest summary of proposed changes, titled “Unified Framework for Fixing Our Broken Tax Code”. The effective date of most provisions was not addressed in the framework, so it’s unknown if these changes will be retroactive to the beginning of 2017, or will not take effect until 2018. This makes planning for year-end a challenge.
Let’s take a look at some of the key changes.
- Tax brackets: The plan reduces our current seven tax bracket system into three: 12%, 25% and 35%. It also leaves the door open for an additional top rate for the highest-income tax payers.
- Deductions Eliminated: To help pay for these reductions, the plan eliminates all itemized deductions except mortgage interest and charitable contributions. This is a big change and means that medical expenses, state income taxes, property taxes and other expenses would no longer be deductible.
- Standard Deduction Doubled: The current standard deduction would be nearly doubled. The amount for married couples would increase from $12,700 to $24,000. For single taxpayers it would increase from $6,350 to $12,000.
- For businesses, the plan sets a maximum tax rate for small and family-owned businesses to 25%. It goes even further to reduce the corporate tax rate to 20%,
For a deeper look at these changes, please visit our website: FHBaird.com
How do we plan during uncertainty?
With the effective date of these changes umonencertain, not to mention the uncertainty of them becoming law at all, tax planning for the rest of 2017 is complicated. The general rule of thumb on tax planning – delay income, accelerate deductions – likely continues to hold here. That’s especially true if these changes are enacted but aren’t effective until next year.
One thing to watch closely is the possibility of most itemized deductions being eliminated. If that appears likely to happen, effective in 2018, taxpayers should accelerate as many deductible expenses into 2017 as possible. Charitable contributions would be the exception as those would still be deductible in 2018, but only for those over the new larger standard deduction amount.
As always, though, any tax strategy should be evaluated based on each taxpayer’s own personal situation, and by preparing a multi-year analysis to see the true impact of moving items between tax years.
For a more detailed analysis of year-end tax strategies, visit Money Matters with Kristin or email me at khillsley@rwbaird.com.