Tax Reform Now: Five Actions to Consider Before December 31, 2017

Tax and Business

Congress officially passed the Tax Cuts and Jobs Act on December 20th. Despite conflicting reports on when President Trump will sign the Act, he will sign it. Here are five last-minute actions you should consider for tax planning before the New Year to minimize your 2017 and 2018 tax liability.

One: Make Your Oregon Fourth Quarter Estimated Tax Payment by December 31st

Individuals who pay quarterly state income taxes should consider making their fourth quarter payment by December 31st. The Act limits the deduction for state and local taxes to $10,000 unless the taxes are paid and accrued in carrying on a trade or business.  In Oregon, the fourth quarter estimated payment is due on January 16, 2018. Paying by December 31st assures that these individuals can maximize their 2017 state and local tax deduction one last time. Strongly consider this action if you receive substantial investment income or are self-employed. The final version of the Act only allows a deduction for payments made for tax years on or before 2017, so do not make an estimated payment for 2018 taxes.

Two: Give More to Your Favorite Charities

Give and you shall receive . . . more in 2017 than 2018. For itemizing taxpayers, charitable contributions are one of the most well-known and utilized deductions. The Act’s decease to the marginal tax rates and the doubling of the standard deduction means a charitable deduction claimed on a 2017 tax return will yield more tax savings than the identical deduction on future tax returns. If you expect your marginal tax rate to decrease, or if you itemize now but might not under the new law, consider talking to your tax advisor about how some last minute giving could be the best gift you receive this holiday season. If you do not have a charity in mind, consider donating to Oregon’s Campaign for Equal Justice, whose mission is to make equal access to justice a reality for all Oregonians.

Three: Pay Your Local Property Taxes in Full for 2017-2018

Starting in 2018, individuals will not be able deduct more than $10,000 of their state and local income taxes and their local property taxes. While Oregon allows property taxes to be paid in installments, to be assured an individual can deduct the maximum amount of property taxes paid for the 2017-2018 year, consider writing a check for the installments due in 2018 to your county before the year end. Check with your tax advisor if you are subject to the AMT. The AMT limits the amount of the property tax deduction.

Four:  Pay and Claim Those Unreimbursed Employee Expenses and Other Miscellaneous Deductions Now – Including Your Tax Preparation Fees and Certain Legal Fees

As of 2018, miscellaneous itemized deductions will become a deduction of the past. This includes the deduction for tax preparation expenses, certain legal fees, and unreimbursed employment expenses. Unreimbursed employment expenses can include everything from tools & supplies, union dues, expenses for work related travel, subscriptions to business journals, attending seminars and more. If you expect to pay these expenses next year you should consider paying for them before December 31st. Of course, if you are self-employed or own a business, you will still be able to deduct some of these expenses against business income under the new law. In short: Consider paying your CPA for 2017 tax advice and your 2017 tax filing by December 31st.

Five: Delay That Taxable Gift

Taxpayers considering gifts that would result in the payment of gift taxes or GST may want to wait until 2018. The exemptions for both double in 2018 and a delay in the timing of the gift could reduce or eliminate any tax liability incurred. However, do not hesitate to make that 2017 annual exclusion gift!

Stay Tuned

This article is the first in a series planned to address the numerous changes to tax law imposed by the Tax Cuts and Jobs Act. We strongly recommend you consult with your tax attorneys and tax advisors on the impact of the act on your 2017 taxes and to plan for future years.

Caitlin M. Wong brings her passion for tax law and her commitment to empowering others to her practice at Samuels Yoelin Kantor LLP. Caitlin has experience with all aspects of both federal and state taxation, including tax planning for companies as well as individuals, audits, appeals, tax court litigation, estate planning and trust and estate litigation.

Temporary Tax Reform

Last month, in a rare moment of bipartisan compromise and with (by Congressional standards) blazing speed, Congress and President Obama came together and passed a sweeping tax package, more formally known as the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. President Obama signed the Act into law on December 17, 2010. The following is a brief summary of the key provisions of the Act:

Current income tax rates will be retained for two years (2011 and 2012), with a top rate of 35%.

Capital gains and qualified dividends will continue to be taxed at a top rate of 15% through 2012.

Social security payroll taxes for employees and self-employed workers (which include partners whose incomes are subject to payroll taxes) will receive a reduction in Social Security payroll taxes in 2011, with the “employee-side” rate being reduced from 6.2% to 4.2%. 

An AMT “patch” for 2010 and 2011 will keep the the alternative minimum tax exemption near current levels.

Itemized deductions of higher-income taxpayers will not be reduced. Without this provision, itemized deductions would have been reduced by 3% of adjusted gross income above an inflation-adjusted figure, but the reduction couldn’t exceed 80%.

Tax-free distributions from IRAs to charities are retained for 2011 only. This provision allows taxpayers age 70 1/2 or older to make distributions of up to $100,000 from their Individual Retirement Accounts (IRAs) to charities. In addition, individuals will be allowed to treat IRA transfers to charities during January of 2011 and as if made during 2010).

Businesses expensing equal to 100% will be permitted on the cost of a business’ purchase of equipment and machinery purchases, effective for property placed in service after September 8, 2010 and through December 31, 2011. For property placed in service in 2012, the new law provides for 50% additional first-year depreciation.

Estate taxes are reinstated for 2011 and 2012, with an exemption of $5 million per person and a top rate of 35%. Estates of people who died in 2010 can elect to follow the estate tax rules of either 2010 (no estate tax, but with a “carryover” of a decedent’s tax basis) or 2011 (estate tax with a full “step-up” in tax basis to an asset’s fair market value at the decedent’s date of death).

The Gift Tax Exemption was $1 million prior to 2011. With this lower exemption, if a taxpayer’s cumulative lifetime gifts exceeded this $1 million mark, then they would be required to pay gift taxes. Now, the has be “re-unified” with the estate tax, meaning that the current gift tax exemption is the same amount as the estate tax exemption – i.e. $5 million. Like the changes which the Act makes to the estate tax, this change expires at the end of 2012. This means that for 2011 and 2012, taxpayers have an unprecedented opportunity to make larger estate-planning gifts without paying gift taxes.

“Portability” is the latest buzzword for the estate tax.  New provisions in the Act allows surviving spouses to add their deceased spouses unused estate tax exemption to their own, potentially allowing the surviving spouse to ultimately have $10 million of estate tax exemption. However, this new provision may have limited application. First, the provision will only apply if the first spouse dies after January 1, 2011 and the second spouse dies before December 31, 2012. While Congress may extend this provision, that result is far from certain. Second, the exemption will be lost if the surviving spouse remarries and survives his or her next spouse. Ultimately, we suggest that the traditional use of a “bypass trust” continue to be the first line of defense against the estate tax.

While the new tax bill certainly has benefits to taxpayers and does provide some planning opportunities, because of the fleeting nature of many of the provisions in the bill, planning around some of the bill’s provisions will be a somewhat precarious process. 

The new Congress is already discussing additional “tax reform.” Stay tuned!