2017 Tax Reform: Potential last-minute year-end moves in light of Tax Cuts and Jobs Act

Congress has enacted the biggest tax reform law in thirty years, one that will make fundamental changes in the way you, your family and your business calculate your federal income tax bill, and the amount of federal tax you will pay. Most of the changes will go into effect in 2018.

Lower tax rates. The Tax Cuts and Jobs Act reduces tax rates for many taxpayers, effective for the 2018 tax year. Additionally, many businesses, including those operated as passthroughs, such as partnerships, may see their tax bills cut.

Disappearing or reduced deductions, larger standard deduction. The Tax Cuts and Jobs Act suspends or reduces many popular tax deductions in exchange for a larger standard deduction. 

       Individuals (as opposed to businesses) will only be able to claim an itemized deduction of up to $10,000 ($5,000 for a married taxpayer filing a separate return) for the total of (1) state and local property taxes; and (2) state and local income taxes. 

       The itemized deduction for charitable contributions won’t be chopped. But because most other itemized deductions will be eliminated in exchange for a larger standard deduction (e.g., $24,000 for joint filers), charitable contributions after 2017 may not yield a tax benefit for many because they won’t be able to itemize deductions. 

       The new law temporarily boosts itemized deductions for medical expenses. These expenses can be claimed as itemized deductions to the extent they exceed a floor equal to 7.5% of your adjusted gross income (AGI). Before the new law, the floor was 10% of AGI, except for 2017 it was 7.5% of AGI for age-65-or-older taxpayers. But keep in mind that individuals will have to claim the standard deduction because many itemized deductions have been eliminated. 

Other provisions of interest:

       The new law substantially increases the alternative minimum tax (AMT) exemption amount in 2018. 

       Like-kind exchanges are a popular way to avoid current tax on the appreciation of an asset, but in 2018, such swaps will be possible only if they involve real estate that isn’t held primarily for sale. The new law says the old, far more liberal like-kind exchange rules will continue apply to exchanges of personal property only if you either disposed of the relinquished property or acquired the replacement property on or before Dec. 31, 2017.

       For decades, businesses have been able to deduct 50% of the cost of entertainment directly related to or associated with the active conduct of a business. For example, if you take a client to a nightclub after a business meeting, you can deduct 50% of the cost if strict substantiation requirements are met. But under the new law, for amounts paid or incurred after Dec. 31, 2017, there’s no deduction for such expenses. 

       Under old rules, alimony payments generally were an above-the line deduction for the payor and included in the income of the payee. Under the new law, alimony payments aren’t deductible by the payor or includible in the income of the payee, generally effective for any divorce decree or separation agreement executed after 2017. 

       The new law suspends the deduction for moving expenses after 2017 (except for certain members of the Armed Forces), and also suspends the tax-free reimbursement of employment-related moving expenses.

       Under the old law, various employee business expenses, e.g., employee home office expenses, were deductible as itemized deductions if those expenses plus certain other expenses exceeded 2% of adjusted gross income. The new law suspends the deduction for employee business expenses paid after 2017. 

Please keep in mind that these are only some of the tax changes going into effect with the new tax law. If you would like more details about any aspect of how the new law may affect you, please do not hesitate to call.


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