Tax Reform (12/14/2017)

The U.S. House and Senate have each separately passed a bill that will create sweeping tax reforms. There are substantial differences in the two bills. A joint group of Republicans from the House and Senate are working to incorporate their differences into one bill. Unlike the last major tax reform that took place in 1986, this bill is not retroactive to the beginning of tax year 2017, but will be implemented in 2018. One tax provision that will be enacted may impact many of our clients negatively. Beginning in 2018, a cap of $10,000 on state and local tax deductions will be enacted. You can’t avoid this change. You might be able, however, to get a tax benefit in 2017, although it will be lost in 2018. You should check with your accountant or tax advisor to see if you would benefit by paying certain taxes in 2017 that you might normally pay in 2018. 

You might benefit in a variety of ways by moving state and local tax payments that you would normally pay in 2018 into 2017. One example would be to prepay your 2017 state income taxes rather than waiting to pay them when you file your taxes in 2018. Another idea might be to pay certain state or local fees now, rather than waiting until 2018.  

Here is an example of why you might want to consider some late year tax planning. Let’s say that you have a $20,000 property tax bill that was received in 2017 but only one half, or $10,000, was due in 2017, with the right to defer payment on the other half until 2018. Normally you would wait and pay the bill in 2018. However, under the new tax code, you will only be able to deduct up to $10,000 in 2018. If you wait, you will have to pay $10,000 in 2018 for your 2017 bill and then, later in the year, $10,000 on your 2018 tax bill. This means that you will have $20,000 of property taxes paid in 2018 but you can only deduct $10,000. If, instead, you pay the 2017 property tax bill of $20,000 in its entirety in 2017, you can write off the entire amount in 2017, perhaps helping to reduce your 2017 federal tax payments. In 2018 you will get another bill for $20,000 for your property taxes, when you can pay the first half, $10,000 and defer the second part until 2019. In this way, you will be able to write off the $10,000 you paid in 2018 and not lose out on any deductions for that year. Unfortunately, if you follow this into 2019 you will now be losing a big chunk of your previous tax deductions because of the $10,000 cap on state and local deductions.  Some tax benefit now is better than no tax benefit later.  

Ed Mallon

December 14, 2017