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

With the Tax Cuts and Jobs Act reportedly headed for the President’s desk shortly, many clients may be asking what they can do before year-end to best position themselves for tax savings, and to avoid or soften the impact of disappearing deductions. The following Client Letter offers year-end moves that can accomplish those goals.

Congress is enacting 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. Since most of the changes will go into effect next year, there’s still a narrow window of time before year-end to soften or avoid the impact of crackdowns and to best position yourself for the tax breaks that may be heading your way. Here’s a quick rundown of last-minute moves you should think about making.

Lower tax rates coming. The Tax Cuts and Jobs Act will reduce 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.

The general plan of action to take advantage of lower tax rates next year is to defer income into next year. Some possibilities follow:

  • If you are about to convert a regular IRA to a Roth IRA, postpone your move until next year. That way you’ll defer income from the conversion until next year and have it taxed at lower rates.
  • Earlier this year, you may have already converted a regular IRA to a Roth IRA but now you question the wisdom of that move, as the tax on the conversion will be subject to a lower tax rate next year. You can unwind the conversion to the Roth IRA by doing a recharacterization-making a trustee-to-trustee transfer from the Roth to a regular IRA. This way, the original conversion to a Roth IRA will be cancelled out. But you must complete the recharacterization before year-end. Starting next year, you won’t be able to use a recharacterization to unwind a regular-IRA-to-Roth-IRA conversion.
  • If you run a business that renders services and operates on the cash basis, the income you earn isn’t taxed until your clients or patients pay. So if you hold off on billings until next year-or until so late in the year that no payment will likely be received this year-you will likely succeed in deferring income until next year.
  • If your business is on the accrual basis, deferral of income till next year is difficult but not impossible. For example, you might, with due regard to business considerations, be able to postpone completion of a last-minute job until 2018, or defer deliveries of merchandise until next year (if doing so won’t upset your customers). Taking one or more of these steps would postpone your right to payment, and the income from the job or the merchandise, until next year. Keep in mind that the rules in this area are complex and may require a tax professional’s input.
  • The reduction or cancellation of debt generally results in taxable income to the debtor. So if you are planning to make a deal with creditors involving debt reduction, consider postponing action until January to defer any debt cancellation income into 2018.

Disappearing or reduced deductions, larger standard deduction. Beginning next year, the Tax Cuts and Jobs Act suspends or reduces many popular tax deductions in exchange for a larger standard deduction. Here’s what you can do about this right now:

  • 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. To avoid this limitation, pay the last installment of estimated state and local taxes for 2017 no later than Dec. 31, 2017, rather than on the 2018 due date. But don’t prepay in 2017 a state income tax bill that will be imposed next year – Congress says such a prepayment won’t be deductible in 2017. However, Congress only forbade prepayments for state income taxes, not property taxes, so a prepayment on or before Dec. 31, 2017, of a 2018 property tax installment is apparently OK.
  • 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. If you think you will fall in this category, consider accelerating some charitable giving into 2017.
  • The new law temporarily boosts itemized deductions for medical expenses. For 2017 and 2018 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 next year many individuals will have to claim the standard deduction because many itemized deductions have been eliminated. If you won’t be able to itemize deductions after this year, but will be able to do so this year, consider accelerating “discretionary” medical expenses into this year. For example, before the end of the year, get new glasses or contacts, or see if you can squeeze in expensive dental work such as an implant.

Other year-end strategies. Here are some other last minute moves that can save tax dollars in view of the new tax law:

  • The new law substantially increases the alternative minimum tax (AMT) exemption amount, beginning next year. There may be steps you can take now to take advantage of that increase. For example, the exercise of an incentive stock option (ISO) can result in AMT complications. So, if you hold any ISOs, it may be wise to postpone exercising them until next year. And, for various deductions, e.g., depreciation and the investment interest expense deduction, the deduction will be curtailed if you are subject to the AMT. If the higher 2018 AMT exemption means you won’t be subject to the 2018 AMT, it may be worthwhile, via tax elections or postponed transactions, to push such deductions into 2018.
  • Like-kind exchanges are a popular way to avoid current tax on the appreciation of an asset, but after Dec. 31, 2017, such swaps will be possible only if they involve real estate that isn’t held primarily for sale. So if you are considering a like-kind swap of other types of property, do so before year-end. The new law says the old, far more liberal like-kind exchange rules will continue apply to exchanges of personal property if you either dispose of the relinquished property or acquire 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. So if you’ve been thinking of entertaining clients and business associates, do so before year-end.
  • Under current rules, alimony payments generally are 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. So if you’re in the middle of a divorce or separation agreement, and you’ll wind up on the paying end, it would be worth your while to wrap things up before year end. On the other hand, if you’ll wind up on the receiving end, it would be worth your while to wrap things up next year.
  • 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. So if you’re in the midst of a job-related move, try to incur your deductible moving expenses before year-end, or if the move is connected with a new job and you’re getting reimbursed by your new employer, press for a reimbursement to be made to you before year-end.
  • Under current law, various employee business expenses, e.g., employee home office expenses, are deductible as itemized deductions if those expenses plus certain other expenses exceed 2% of adjusted gross income. The new law suspends the deduction for employee business expenses paid after 2017. So, we should determine whether paying additional employee business expenses in 2017 that you would otherwise pay in 2018, would provide you with an additional 2017 tax benefit. Also, now would be a good time to talk to your employer about changing your compensation arrangement-for example, your employer reimbursing you for the types of employee business expenses that you have been paying yourself up to now, and lowering your salary by an amount that approximates those expenses. In most cases, such reimbursements would not be subject to tax.

Five Exemptions from Social Security Taxes

Although Social Security taxes keep on going up, there are many payments that are not subject to Social Security taxes. Among them:

  1. Payments that are not compensation for services such as rents, dividends, interest, inheritances, and gifts.
  2. Company fringe benefit payments such as premiums for health and accident insurance and certain qualified educational benefits
  3. Wages paid to your under-age-18 children if you are self employed. (Wages paid by a corporation are subject to Social Security taxes.)
  4. The cash value of meals and lodging which is made by an employer for the employer’s convenience.
  5. Company loans to a stockholder or an employee when the loan is fully documented to show that it is a legitimate loan which will be repaid.

The Unbreakable Rules of Successful Money Management

There’s no real secret to managing your money wisely. With a little discipline, you can protect your money and maximize its growth by sticking to a few basic investment principles. Here are the most important.

Winners

Never invest in anything you don’t understand. You wouldn’t buy a book written in a strange language and you shouldn’t put your money in anything you don’t understand completely. If you don’t know all the details about what your money is buying, look elsewhere.

Don’t make snap judgements. Just because your brother-in-law made a fast profit on a new high-tech stock doesn’t mean it’s for you. Your situation and your risk tolerance are unique. Think before you invest.

Diversify. It’s a common money management mistake to put all your funds in one place. You can substantially reduce your risk and improve your profit potential by dividing your money among fixed income investments, equities, and cash. Always diversify, no matter how much money you have to invest.

Be patient. Don’t buy stocks or mutual funds and expect big profits in a few months. It often takes years for an equity investment to pay off. Buying and selling stocks over the short term is almost always bad money management.

Don’t invest just to save taxes. You might save taxes but wind up losing money. Tax-free investments invariably pay less than other investments. Consider your total after-tax return before you invest. When you make a profit, take it. If you buy a stock, pick a price at which you’ll make a satisfactory profit. When the stock reaches that price, sell. Remember, stocks go down as well as up and there’s no guarantee that a rising stock will continue to go up.

Ignore hot tips. They’re almost always wrong no matter how convincing or well-meaning your source is.

Always keep track of your investments. Monitor your investments at least once a month. It only takes a few minutes to look in the newspaper or call your broker. Unpleasant surprises should be and can be avoided.

Read the fine print. CDs carry a substantial penalty for early withdrawal. High money market interest rates may apply only for the first few months your money is invested. And there’s a big difference between interest rates and effective annual yield.

Better Ways to Control Accounts Receivable

With an uncertain economy and unpredictable interest rates ahead, improving a company’s cash position should be a major priority for any business. In most cases, the answer to this challenge is better control of accounts receivable.

Tuning up your collection system

Staircase to money

Too often,companies allow their receivables to age to a point where the business is strapped for cash. It’s not uncommon for four or five months to pass before management takes action to collect past due accounts, usually because the company doesn’t have a clear collection policy.

Effective receivable control is based on a regular review of the company’s receivables. Ninety days from the date a receivable becomes past due is the point at which your company should decide whether it wants to continue to do business with a late-paying customer.

If a customer is important,a mutually satisfactory schedule for payment of past due balances should be set up together with an understanding that covers payment for future purchases. It’s important to resolve both of these issues at the same time to avoid future problems while the customer is paying off past due amounts.

If you can’t work out a satisfactory schedule for payment of the past due balance within a reasonable amount of time, or if it becomes apparent that the customer is in real financial trouble, it’s time to bite the bullet and turn the matter over to a collection agency.
An ounce of prevention… Although there’s no guarantee that better control over accounts receivable will result in the timely payment of all receivables, there are several other steps that a company can take to reduce the age of its accounts receivable.

  • Credit checking.
    It’s surprising how many businesses will accept orders from new customers without doing a thorough credit check. It’s the obvious way to head off future problems. And it’s just as important to make occasional credit checks for large existing customers to make sure that their credit ratings aren’t slipping.
  • Applications for credit.
    A credit application is another basic technique to reduce collection problems. At the least, a company should know the names of its customers’ owners, banks, and major suppliers. Not only is this information useful for immediate credit decisions, but it can be essential if a collection problem arises in the future.
  • Customer communications.
    There’s no better way to assure improved collections than to make certain that a new customer understands that your company must be paid in a timely manner. If a customer doesn’t get a clear message to that effect, you can give the impression that prompt payment isn’t really important to your company. It’s just as critical to keep in touch with new customers to find out if they are satisfied with your product. Make every effort to do this before payment is due, to avoid future excuses for delayed payments because of problems you didn’t know about.

Invoice discounts and late payment charges
Offering customers a discount for prompt payment usually won’t speed up your collections. In fact, it can often backfire because customers take the discount but don’t fulfill the terms. It’s much better to bill a net amount and clearly indicate terms of payment on the invoice. Some companies charge a penalty for past due payments, but unless a customer is made aware of this in advance, the customer is not legally obligated to pay late charges. It’s best to stick with conventional invoicing and tighten up your internal controls over receivables.

TaxPoints Sep-Oct 2009

TAX DEDUCTIONS FOR BUSINESS

Deduct home-office expenses for part of a room. A Tax Court case says that if you use a portion of a room as your principal place of business, you can deduct the expenses allocated to that portion.

Example: A music teacher could deduct expenses for the part of his bedroom in which he gave lessons.

Claim an additional deduction for the cost of laundry, cleaning, lodging taxes, and telephone calls while on business trips. If you substantiate your business travel using the government’s per diem allowance, you can claim both the per diem allowance and a separate deduction for these items.

Caution: Be sure to keep receipts and other records to back up your deduction.

Machinery and equipment. It’s best to elect to expense equipment in the year it is placed in service rather than depreciating it over several years (usually five or seven years, depending on the type of equipment). For 2009, the dollar limit on expensing is $250,000.

Caution: Don’t make the election to expense if you’re not making a profit – the deduction will be worth nothing to you. Instead, depreciate the equipment over its recovery period. In the future, when you’re profitable, the depreciation deductions will be more valuable.

How to Get Tax-Free Income From Your Vacation Home

If you rent your vacation residence for less than fifteen days during a year, you can’t take a deduction for rental use expenses such as maintenance and depreciation. However, the rental income you receive doesn’t have to be included in your gross income.

House Asset

Taxpayers who live in homes where there is a strong rental demand during a short period of the year can receive high rents for these brief periods and not pay taxes on the rental income.

The Art of Negotiation

When you sit down at a negotiating table, the seat you choose can have a real effect on your negotiations.

The seat at the head of the table is considered the “power seat” and that’s where you should sit if you want to appear to be in command of the discussions.

But think twice before you do it, because some people resent the presumption of authority. After you’ve sized up the situation, it might be wiser to sit on the same side of the table as your opponent.

This can lessen the adversary aspect of your negotiations and make others feel that you’ll be friendly and cooperative.

Handshake Silhouette

Make sure price comparisons are fair.

When a prospective customer tells you that your price isn’t competitive, don’t offer a better price until you compare all the details of your offer with the details of what your competitor is offering.

You may be able to point out significant differences that the customer has overlooked such as delivery charges, terms of payment, product specifications, and return privileges. Best way to do it: ask the customer.

More Tax Tips Sep-Oct 2009

Save Estate Taxes with Year-End Gifts.

If your assets are substantial, making year-end gifts to your children can reduce the value of your taxable estate. Here are some guidelines for a gift-giving program.

  • There are maximum annual amounts which are free from the federal gift tax. For unmarried donors, the upper figure is $13,000 annually. Married donors can make an annual combined gift of up to $26,000.
  • Gifts that exceed the maximum limit, but are made as direct payment for tuition or medical bills, can be tax-free.
  • If you prefer not to make large gifts to younger children, there are several alternatives available, including certain trusts and custodial accounts. Consult with your acccountant to find out which is best for you.

When It Pays To Borrow For Estimated Tax Payments.

If you file estimated tax returns, you may occassionally find yourself short of the cash needed to make a payment and face an IRS penalty for late payment.

Rather than missing a payment, consider borrowing enough to make the payment. The interest you’ll pay on the money you borrow will probably be less than the penalty for not meeting the estimated tax requirement. And some part of the loan interest may be deductible as well.

Plan for Tax Savings when Setting up a Family Business

Piggy Bank

Family-owned businesses can offer an opportunity for considerable tax savings. Not only can you opt for a corporation, a proprietorship, or a partnership, but you can also combine the various forms of ownership to your advantage.

If you organize the business as a partnership or Subchapter S corporation, for instance, early business losses can be passed through to owners in high tax brackets. When the business begins to show a profit, title or stock can be transferred to younger family members who are in lower tax brackets.

If the business is organized as a corporation, its real estate, machinery, or equipment can be owned by an individual and leased to the company. Rental income will pass directly to the owners without being subject to corporate tax. ownership of these majorassets can also be placed in trust for the benefit of the owners’ children to take advantage of income splitting.

Obviously, the business structure that most benefits one family will not necessarily suit another. In addition, the tax law restricts the deductibility of certain family-owned business losses. So be sure to consult with your tax professional before you choose a structure for a family business.