On December 15, 2017, the Conference Committee reconciled the House and Senate versions of tax reform into the final proposed “Tax Cuts and Jobs Act” that is expected to be signed into law this week. The proposal outlines some of the most substantial changes to our tax system in decades. How these changes will impact each individual and business will vary and is still to be determined. The changes will not take effect until 2018. However, with the end of 2017 quickly approaching, we wanted to take this opportunity to highlight some potential tax savings strategies for 2017 in light of the proposed tax reform.
Highlights of proposed 2018 changes to itemized deductions are as follows:
- State and local taxes: Individuals would be allowed to deduct up to $10,000 in state, local, sales and property taxes.
- Mortgage interest: The home mortgage interest deduction would be modified to reduce the limit on acquisition indebtedness to $750,000 from the current law of $1 million for debt incurred after December 15, 2017. The home equity loan interest deduction would be repealed.
- Medical expense deduction: Although initially the House wanted to eliminate this deduction, the current proposal keeps this deduction and reduces the threshold to 7.5% of adjusted gross income for 2018.
- Miscellaneous itemized deductions: All miscellaneous deductions subject to the 2% floor under current law would be repealed. For example, unreimbursed employee expenses, tax preparation fees and investment fees.
As the bill is currently written, beginning in 2018, the standard deduction amounts will increase to $12,000 for single individuals and $24,000 for married taxpayers filing jointly. This is an increase from the 2017 amounts of $6,350 and $12,700, respectively.
Due to the reduced itemized deductions proposed to be allowed in 2018 along with the increase in the standard deduction, there is a chance you may fall within the standard deduction threshold for 2018 even if you had previously itemized. As such, there may be an opportunity for accelerating some itemized deductions into 2017 which may otherwise be lost in 2018 should the bill pass.
Here are a few actions you may wish to consider by December 31, 2017:
- Pay additional real estate taxes on your personal residence and/or vacation home.
- Make additional charitable contributions. Although charitable contribution deduction was not eliminated or reduced, if you are no longer itemizing, you would lose this deduction.
- Pay 4th quarter state estimated tax payments, usually due January 15th.
- Pay state and local income taxes that might be due with your tax return on April 15, 2018. If your income is expected to be greater in 2017 than in 2016, you may owe state taxes for 2017.
- Accelerate interest payments with your bank.
- Accelerate any deductions subject to the 2% AGI limitation if the total of these expenses exceed the 2% threshold.
The benefits of some of these strategies could be mitigated if you are subject to AMT (Alternative Minimum Tax).
To learn more, or to discuss specific strategies, please contact us. We would be happy to meet with you. bgr CPAs will continue to monitor the status of the proposed tax reform legislation and provide additional updates as they become available.