Year-End Planning In The Wake of Tax Reform 2.0

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House lawmakers recently passed the third and final portion of Tax Reform 2.0, despite the high probability that the Senate will not hold a vote on it because it doesn't seem to have the votes needed to pass. This comes as planning strategies are being considered for year-end tax savings for 2018 by applying the new tax provisions in the Tax Cuts and Jobs Act of 2017.

Tax Reform 2.0 is actually a collection of three bills. The Protecting Family and Small Business Tax Cuts Act of 2018, The Family Savings Act of 2018, and The American Innovation Act.

The first bill, Protecting Family and Small Business Tax Cuts Act of 2018 (HR. 6760), would make permanent the individual provisions of the TCJA which are set to expire in 2025.

The second bill in the series, the Family Savings Act of 2018 (HR. 6757), would make several improvements to the way the tax code treats personal saving. This includes the introduction of a new savings vehicle, called universal savings accounts (USAs), as well as some other improvements to retirement savings.

And the third bill, the American Innovation Act of 2018 (HR. 6756), would allow businesses to deduct up to $20,000 of their start-up costs.

Like the TCJA, these bills are mostly good news for taxpayers. Unlike the TCJA, we are fairly certain the bills will not impact planning for 2018. Planning to take advantage of the changes that were already enacted has been difficult thus far due to the uncertainties as to how to interpret the reform legislation. With over 130 changes, the IRS has indicated that it could take some time for regulations and guidance to be released.

The IRS has issued a series of notices, information releases, and frequently asked questions.  In addition, there have been a few proposed regulations and draft tax forms with instructions.

Here is a recap of a few points of clarification we have received so far:

  • The draft of the form 1040 has been released. There is only one 1040 with 23 lines.   However, there are now six new supplemental schedules. It is not exactly the postcard return that was promised.
  • There are now proposed regulations that can be relied upon to determine which companies and individuals will be eligible to take the new Qualified Business Income deduction of up to 20% of eligible income. The regulations provide further clarification on the calculation of the deduction as well as the service businesses that may be eligible.
  • Tax Exempt Organizations with more than one unrelated trade or business must calculate unrelated business taxable income separately for each trade or business according to Notice 2017-67.
  • Meals and entertainment expenses that are deductible business expenses have been clarified.

Here are some moves you should consider before year end:

  • Revisit 529 Indiana College Choice plans – more eligible expenses are now allowed and Indiana has a credit of 20% of contributions up to $1,000 per return.
  • Charitable contribution limits have increased to 60% of taxable income. You may want to accelerate deductions into the current year and effectively bunch deductions by alternating years if your annual giving is typically under the standard deduction.  Donation of appreciated stock can reduce capital gains and take advantage of the charitable deduction for the current value of the stock.
  • Consider setting up a donor advised charitable fund that will give you an immediate deduction but allow you to recommend grants to charitable organizations in the future, after the funds accumulate earnings tax free. The donor advised funds could also help with the bunching strategy while still allowing you to make your usual annual donations out of the fund.
  • Retired Individuals can direct their Required Minimum Distributions (RMD) to charitable organizations, as well as coordinate IRA and Retirement plan withdrawals to minimize taxation of social security.
  • Maximize contributions to retirement plans.
  • Business owners eligible for the 20% Qualified Business Income deduction can consider ways to maximize W2 wages to take advantage of the deduction if payroll taxes are offset.
  • Business owners can invest in short-lived depreciable assets to take advantage of first year expensing.

Tax Reform is good news for most taxpayers, but here are a few items that should be considered that may not be offset by the lower rates and could have an adverse impact on your tax situation.

  • Withholding rates are lower which could impact your safe harbor estimates if you have income other than wages. Check your withholding before year-end to adjust your estimates.
  • Elimination of employee business expense deduction together with other 2% deductions
  • Home equity debt limitations have been modified
  • Local tax deduction has been capped
  • Personal exemptions are no longer available
  • Casualty and theft losses are available only for presidentially declared disaster areas
  • Businesses interest deduction is limited
  • Net operating loss limitations now apply
  • Like kind exchanges are now limited to real estate only
  • Employer deduction for certain fringe benefits are disallowed

Lou Ann Taylor is a director of tax for Alerding CPA Group.

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