November 7th, 2017 PBN’s Five Questions With Michael DeCataldo When should folks start thinking about year-end tax planning? Why? It is never too early to start thinking about tax planning. The tax law is complicated and the interaction of various tax provisions must be considered when making decisions that affect your taxes. A simple example is the prepayment of your fourth quarter state income taxes. Normally, if you itemize your deductions, accelerating your state tax deduction is an effective way to reduce your federal tax liability. However, if you are subject to the alternative minimum tax (AMT), this tax planning strategy could backfire. Many of our clients require quarterly income tax projection because of the complexity of their tax situations but for most individuals an annual projection can help them quantify their projected 2017 federal and state income tax liability. By starting the planning process now, you leave yourself sufficient time to implement various tax saving strategies before the end of the year. What can individuals do to try and lower their tax bill? Simple tax planning strategies include prepaying deductible expenses in 2017 and deferring when possible income into 2018. Also, tax loss harvesting is an important planning technique if you have incurred capital gains in 2017. Tax loss harvesting is the identification of stocks that you hold that currently have an unrealized loss. i.e. your cost basis is currently higher than the stock’s fair market value. If you sell the stocks before year-end you can use the losses to off-set gains that have already been realized. Just remember that these loss stocks should not be repurchased for at least 30 days to avoid the “wash sale” rule that would disallow the loss and eliminate the potential tax savings. Other effective ways to reduce taxes are to maximize your 401(k) contribution and to make eligible deductible individual retirement contributions (IRA) before year end. Also, you can receive a double benefit by using appreciated securities to make charitable contributions before year end. By using appreciated stock you receive a charitable deduction for the stock’s fair market value and you do not have to pay tax on the built-in appreciation. How about businesses? Businesses should consider purchasing new equipment before year end to take advantage of the $510,000.00 expensing election that allows a business to deduct what would normally be considered a capital expenditure. Also, taking advantage of the 50% bonus depreciation, which is another way to accelerate the deduction for the purchase of what would normally be considered a capital item, is an efficient way to reduce current year taxes. Businesses that operate in multiple states should be aware that many states have different and more restrictive rules when it comes to bonus depreciation and the expensing election. Business owners should stay alert to current on tax reform initiatives which could make substantial changes to how the purchase of capital assets are handled. Business like individuals should also consider accelerating deductions into 2017 and deferring income into 2018. Under current tax reform proposals both corporations and the owners of flow through entities can expect lower tax rates in 2018. Again, keep an eye on Washington as no one really knows which proposed changes will make it into any final tax reform bill. An often overlooked business deduction is the Domestic Production Activity Deduction (DPAD) which can generate a deduction of up to 9% of income received for qualified production activities. How does the discussion of tax reform at the federal level impact year-end tax planning? Why? On November 2, 2017 the House Republicans released the Tax Cuts and Jobs Act. Not knowing the final version of the proposals found in this Act will make tax planning for this year very difficult. Although most Americans and their businesses should see some sort of tax reduction, the general rule of deferring income and accelerating deductions, which was discussed earlier, does not work if an individual’s tax rate will be higher in 2018. There may be some individuals that could see their taxes go up in 2018 because of the reduction in the number of tax rates from seven to four. Some individuals that were in the 33% tax bracket in 2017 may find some of their income being taxed at 35% in 2018. The final enacted income tax brackets will determine the winners and losers. If an individual feels that he will find himself in a higher tax bracket next year than the normal tax planning should be reversed and deductions should be postponed and income accelerated. However, if the elimination of the state tax deduction were to find its way into the final version of any tax reform, the prepayment of state income taxes makes sense for all individuals that itemize their deductions regardless of their anticipated tax rate in 2018. Remember, however, that if you are subject to the AMT you may receive little to no tax benefit when you deduct your state taxes. I would recommend that everyone pay close attention to what comes out of Washington in the next few weeks as this final bill could look very different from the law that actually gets enacted. By quantifying your estimated 2017 federal and state tax liability as earlier as possible you will have a starting point to determine the impact of any tax reform on this year’s tax planning techniques. Why should individuals and businesses consider working with Sansiveri, Kimball & Co., LLP to navigate year-end tax planning? We believe that we have the resources necessary to quantify an individual or business’s projected tax liability and are intimately aware of how various tax provisions interact and counteract each other. We are following the tax law developments closely in an attempt to determine what is most likely to be included, added or eliminated from any final tax reform bill. By beginning the planning process early we will have the ability to impact changes in our planning options right up until December 31st. As Washington fine tunes its tax legislation and as various tax proposals get closer to becoming actual law we will be able to adjust our tax planning suggestions and adapt it to our individual and business clients.