The holidays are upon us and, although family and friends should be at the forefront of our thoughts, this is also the time to consider year-end tax strategies. In the past, these strategies have not vacillated much due to substantial consistency in the tax law for the better part of three decades. This year, the recent passage of the Tax Cuts and Jobs Act and the changes it makes to rate structures and other tax provisions create an opportunity in the final days of 2017 to permanently save tax dollars. To stoke your interest, here are eight year-end strategies for your consideration:
- SALT Deduction: After 2017, the deductions for state and local income taxes, sales taxes and real property taxes (SALT) will be limited to $10,000. If you ordinarily itemize your deductions, you may want to prepay certain SALT liabilities before year end. This will not benefit all itemizers. If you are subject to the alternative minimum tax, which is still in effect for 2017, the additional SALT deduction will not help you. If you determine there is a benefit, consider paying the balance of your 2017 state and local income taxes before year end as well as assessed property taxes for which payment is not due until 2018.
- Itemized Deductions and Charitable Contributions: The standard deduction increase to $12,000 for single filers and $24,000 for married couples filing jointly, will, for some taxpayers, eliminate the need to itemize deductions. If itemized deductions become unavailable, the tax benefit directly attributable to charitable contributions will be lost. Thus, if you are a current itemizer and are considering whether to make a charitable contribution in 2017 or wait until 2018, it may be in your best interest to accelerate the charitable giving to 2017. Even if you continue to itemize deductions in 2018, the tax benefit of a charitable deduction in 2017 will be higher for many taxpayers because of the changes in the rate structures.
- Charitable Contributions – Stock v. Cash: Talking about charitable contributions, many people have experienced increases in the values of their stock portfolios over the past year. If you are in a philanthropic mood and have appreciated stock (the stock value is in excess of the tax basis), it may be in your best interest to gift the appreciated stock to the charity rather than making a cash contribution because you will be able to take a charitable contribution equal to the fair market value of the contributed stock while avoiding the capital gain tax on the appreciated value.
- Sports Tickets: If you are a sports fan who purchases season tickets for college sporting events, beginning in 2018, you will no longer be entitled to treat as a charitable contribution any portion of the payment that you make to universities for athletic seating rights (i.e., your season seat tickets). Under current law a charitable deduction is available for eighty percent (80%) of the payment made to a university for season tickets. Therefore, if you are intending to purchase season tickets for the 2018 college sports season, pay for them in 2017.
- Business Expenses: For employees who have unreimbursed business expenses, make sure that they are paid before year-end. This deduction, which is a miscellaneous itemized deduction subject to the 2% floor of adjusted gross income, is suspended for tax years beginning in 2018.
- Like-kind Exchanges: Starting in 2018, the like-kind exchange rules that allow taxpayers to defer gain from the sale of certain real and personal property by buying assets of “a like-kind” will be available only for like-kind exchanges of real property not held primarily for sale (typically rental real estate and real estate held for investment). If you intend to do a tax-free like-kind exchange of personal property, you generally must complete the exchange by year-end. There is a grandfather provision for like-kind exchanges of qualified personal property completed after 2017 if one leg of the exchange (i.e., property being exchanged or the property being received) is completed on or before year end. Third-party “qualified intermediaries” typically play a role in these transactions and need to be engaged when the first leg of the transaction takes place.
- Roth Conversions: There are two basic types of individual retirement arrangements (IRAs): traditional IRAs, to which both deductible (pre-tax) and nondeductible (after-tax) contributions may be made, and Roth IRAs, to which only nondeductible contributions may be made. The principal difference between these two types of IRAs is the timing of income tax inclusion. Taxpayers can convert a traditional IRA to a Roth IRA by paying the tax due on the converted amount. A special rule has allowed taxpayers a grace period to decide if they want to pay the tax, by allowing the taxpayers to “unwind” a conversion by recharacterizing the conversion as a contribution to a traditional IRA. The old rule gave taxpayers until the due date of their tax returns for the year of the conversion to take advantage of the unwind provision. Effective December 31, 2017, that flexibility disappears. If you have converted an individual IRA to a Roth IRA or are thinking of doing so, you should be aware that you will lose the ability to reverse the transaction as of the end of this year.
- Planned Gifts: If you plan to make a sizable planned gift that will exceed the current $5.49 million unified credit exclusion amount, wait until 2018 when the exclusion amount increases to approximately $11.2 million.
In the coming weeks and months, and after further review by lawmakers and lobbyists, it is anticipated that there will be technical corrections and other tweaks that may or may not have significant effects on tax outcomes. We will continue to monitor and report on these corrections and changes as they are made. Please stay tuned.
In the meantime, should you have any questions or want to discuss any strategies, please contact Marc Maser at mmaser@mkbattorneys.com or 610-341-1035, Christine Reuther at creuther@mkbattorneys.com or 610-341-1071, or Joan Agran at jagran@mkbattorneys.com or 610-341-1067.