Congress is enacting the biggest tax reform law in thirty years, one that will make fundamental changes in the way you, your family and your business calculate your federal income tax bill, and the amount of federal tax you will pay. Since most of the changes will go into effect next year, there’s still a narrow window of time before year-end to best position yourself for the tax breaks that may be heading your way. Below is a quick rundown of last-minute moves to consider.
Lower tax rates coming. The Tax Cuts and Jobs Act will reduce tax rates for many taxpayers, effective for the 2018 tax year. Additionally, many businesses, including those operated as pass-throughs, such as partnerships, may see their tax bills cut. The general plan of action to take advantage of lower tax rates next year is to defer income into next year.
Some possibilities follow:
- If you are about to convert a regular IRA to a Roth IRA, postpone your move until next year. That way you’ll defer income from the conversion until next year and have it taxed at lower rates.
- If you run a business that renders services and operates on the cash basis, the income you earn isn’t taxed until your clients or patients pay. So if you hold off on billings until next year-or until so late in the year that no payment will likely be received this year-you will likely succeed in deferring income until next year.
- If your business is on the accrual basis, deferral of income till next year is difficult but not impossible. For example, you might, with due regard to business considerations, be able to postpone completion of a last-minute job until 2018, or defer deliveries of merchandise until next year (if doing so won’t upset your customers). Taking one or more of these steps would postpone your right to payment, and the income from the job or the merchandise, until next year. Keep in mind that the rules in this area are complex and may require a tax professional’s input.
Disappearing or reduced deductions, larger standard deduction. Beginning next year, the Tax Cuts and Jobs Act suspends or reduces many popular tax deductions in exchange for a larger standard deduction.
Here’s what you can do about this right now:
- Individuals (as opposed to businesses) will only be able to claim an itemized deduction of up to $10,000 ($5,000 for a married taxpayer filing a separate return) for the total of (1) state and local property taxes; and (2) state and local income taxes. To avoid this limitation, pay the last installment of estimated state and local taxes for 2017 no later than Dec. 31, 2017, rather than on the 2018 due date. But don’t prepay in 2017 a state income tax bill that will be imposed next year – Congress says such a prepayment won’t be deductible in 2017. However, Congress only forbade prepayments for state income taxes, not property taxes, so a prepayment on or before Dec. 31, 2017, of a 2018 property tax installment is apparently OK.
- The itemized deduction for charitable contributions won’t be chopped. But because most other itemized deductions will be eliminated in exchange for a larger standard deduction (e.g., $24,000 for joint filers), charitable contributions after 2017 may not yield a tax benefit for many because they won’t be able to itemize deductions. If you think you will fall in this category, consider accelerating some charitable giving into 2017.
- The new law temporarily boosts itemized deductions for medical expenses. For 2017 and 2018 these expenses can be claimed as itemized deductions to the extent they exceed a floor equal to 7.5% of your adjusted gross income (AGI). Before the new law, the floor was 10% of AGI, except for 2017 it was 7.5% of AGI for age-65-or-older taxpayers. But keep in mind that next year many individuals will have to claim the standard deduction because many itemized deductions have been eliminated. If you won’t be able to itemize deductions after this year, but will be able to do so this year, consider accelerating “discretionary” medical expenses into this year. For example, before the end of the year, get new glasses or contacts, or see if you can squeeze in expensive dental work such as an implant.
Other year-end strategies. Here are some other last-minute moves that can save tax dollars in view of
the new tax law:
- The new law substantially increases the alternative minimum tax (AMT) exemption amount, beginning next year. There may be steps you can take now to take advantage of that increase. For example, the exercise of an incentive stock option (ISO) can result in AMT complications. If you hold any ISOs, it may be wise to postpone exercising them until next year. And, for various deductions, e.g., depreciation and the investment interest expense deduction, the deduction will be curtailed if you are subject to the AMT. If the higher 2018 AMT exemption means you won’t be subject to the 2018 AMT, it may be worthwhile, via tax elections or postponed transactions, to push such deductions into 2018.
- Like-kind exchanges are a popular way to avoid current tax on the appreciation of an asset, but after Dec. 31, 2017, such swaps will be possible only if they involve real estate that is not held primarily for sale. So if you are considering a like-kind swap of other types of property, do so before year-end. The new law says the old, far more liberal like-kind exchange rules will continue apply to exchanges of personal property if you either dispose of the relinquished property or acquire the replacement property on or before Dec. 31, 2017.
- For decades, businesses have been able to deduct 50% of the cost of entertainment directly related to or associated with the active conduct of a business. For example, if you take a client to a nightclub after a business meeting, you can deduct 50% of the cost if strict substantiation requirements are met. But under the new law, for amounts paid or incurred after Dec. 31, 2017, there’s no deduction for such expenses. So if you’ve been thinking of entertaining clients and business associates, do so before year-end.
- Under current rules, alimony payments generally are an above-the line deduction for the payor and included in the income of the payee. Under the new law, alimony payments are not deductible by the payor or included in the income of the payee, generally effective for any divorce decree or separation agreement executed after 2017. So if you’re in the middle of a divorce or separation agreement, and you’ll wind up on the paying end, it would be worth your while to wrap things up before year end. On the other hand, if you’ll wind up on the receiving end, it would be worth your while to wrap things up next year.
- The new law suspends the deduction for moving expenses after 2017 (except for certain members of the Armed Forces), and also suspends the tax-free reimbursement of employment-related moving expenses. If you are in the midst of a job-related move, try to incur your deductible moving expenses before year-end, or if the move relates to a new job and you are getting reimbursed by your new employer, press for a reimbursement to be made to you before year-end.
- Under current law, various employee business expenses, e.g., employee home office expenses, are deductible as itemized deductions if those expenses plus certain other expenses exceed 2% of adjusted gross income. The new law suspends the deduction for employee business expenses paid after 2017. We should determine whether paying additional employee business expenses in 2017, that you would otherwise pay in 2018, would provide you with an additional 2017 tax benefit. Also, now would be a good time to talk to your employer about changing your compensation arrangement-for example, your employer reimbursing you for the types of employee business expenses that you have been paying yourself up to now, and lowering your salary by an amount that approximates those expenses. In most cases, such reimbursements would not be subject to tax.
These are only some of the year-end moves to consider in light of the new tax law. If you would like more details about any aspect of how the new law may affect you, please contact your tax professional.
On December 20, the House passed the reconciled tax reform bill, commonly called the “Tax Cuts and Jobs Act of 2017” (TCJA), which the Senate had passed the previous day. Once signed by the President, this marks the most sweeping tax legislation since the Tax Reform Act of 1986.
The bill makes small reductions to income tax rates for most individual tax brackets, significantly reduces the income tax rate for corporations and eliminates the corporate alternative minimum tax (AMT). It also provides a large new tax deduction for owners of pass-through entities and significantly increases individual AMT and estate tax exemptions. And it makes major changes related to the taxation of foreign income.The TCJA also eliminates or limits many tax breaks, and much of the tax relief is only temporary.
Here is a quick rundown of some of the key changes affecting individual and business taxpayers. Except where noted, these changes are effective for tax years beginning after December 31, 2017.
Key changes affecting individuals
- Drops of individual income tax rates ranging from 0 to 4 percentage points (depending on the bracket) to 10%, 12%, 22%, 24%, 32%, 35% and 37% — through 2025
- Near doubling of the standard deduction to $24,000 (married couples filing jointly), $18,000 (heads of households), and $12,000 (singles and married couples filing separately) — through 2025
- Elimination of personal exemptions — through 2025
- Doubling of the child tax credit to $2,000 and other modifications intended to help more taxpayers benefit from the credit — through 2025
- Elimination of the individual mandate under the Affordable Care Act requiring taxpayers not covered by a qualifying health plan to pay a penalty — effective for months beginning after December 31, 2018
- Reduction of the adjusted gross income (AGI) threshold for the medical expense deduction to 7.5% for regular and AMT purposes — for 2017 and 2018
- New $10,000 limit on the deduction for state and local taxes (on a combined basis for property and income taxes; $5,000 for separate filers) — through 2025
- Reduction to the mortgage debt limit for the home mortgage interest deduction, to $750,000 ($375,000 for separate filers), with certain exceptions — through 2025
- Elimination of the deduction for interest on home equity debt — through 2025
- Elimination of the personal casualty and theft loss deduction (with an exception for federally declared disasters) — through 2025
- Elimination of miscellaneous itemized deductions subject to the 2% floor (such as certain investment expenses, professional fees and unreimbursed employee business expenses) — through 2025
- Elimination of the AGI-based reduction of certain itemized deductions — through 2025
- Elimination of the moving expense deduction (with an exception for members of the military in certain circumstances) — through 2025
- Expansion of tax-free Section 529 plan distributions to include those used to pay qualifying elementary and secondary school expenses, up to $10,000 per student per tax year
- AMT exemption increase, to $109,400 for joint filers, $70,300 for singles and heads of households, and $54,700 for separate filers — through 2025
- Doubling of the gift and estate tax exemptions, to $10 million (expected to be $11.2 million for 2018 with inflation indexing) — through 2025
Key changes affecting businesses
- Replacement of graduated corporate tax rates ranging from 15% to 35% with a flat corporate rate of 21%
- Repeal of the 20% corporate AMT
- New 20% qualified business income deduction for owners of flow-through entities (such as partnerships, limited liability companies and S corporations) and sole proprietorships — through 2025
- Doubling of bonus depreciation to 100% and expansion of qualified assets to include used assets — effective for assets acquired and placed in service after September 27, 2017, and before January 1, 2023
- Doubling of the Section 179 expensing limit to $1 million and an increase of the expensing phaseout threshold to $2.5 million
- Other enhancements to depreciation-related deductions
- New disallowance of deductions for net interest expense in excess of 30% of the business’s adjusted taxable income (exceptions apply)
- New limits on net operating loss (NOL) deductions
- Elimination of the Section 199 deduction, also commonly referred to as the domestic production activities deduction or manufacturers’ deduction — effective for tax years beginning after December 31, 2017, for noncorporate taxpayers and for tax years beginning after December 31, 2018, for C corporation taxpayers
- New rule limiting like-kind exchanges to real property that is not held primarily for sale
- New tax credit for employer-paid family and medical leave — through 2019
- New limitations on excessive employee compensation
- New limitations on deductions for employee fringe benefits, such as entertainment and, in certain circumstances, meals and transportation
November 9 was a busy day in Washington for lawmakers in their race to create a tax reform package. The House Ways and Means Committee made amendments to, and approved, the Tax Cuts and Jobs Act. And the Senate Finance Committee released “policy highlights” for its proposed version of a tax plan.
Many of the House and Senate provisions are similar. For example, both plans would repeal the alternative minimum tax and retain the charitable contribution deduction. However, there are a number of key differences. Here is a high-level comparison of the House and the Senate tax bill proposals:
The following changes would generally be effective beginning in 2018:
- Individual tax rates.
- The House bill would consolidate the seven current federal income tax brackets into four: 12%, 25%, 35% and 39.6%.
- The Senate plan would still have seven tax brackets, but they would be 10%, 12%, 22.5%, 25%, 32.5%, 35% and 38.5%. (Currently, the brackets are 10%, 15%, 25%, 28%, 33%, 35% and 39.6%.)
- Personal exemptions and standard deduction.
- The House bill would eliminate the current personal exemptions for taxpayers and their dependents. It would nearly double the standard deduction to $12,000 for single filers and $24,000 for married couples (adjusted for inflation), which, for many taxpayers, would remove the incentive to itemize deductions.
- The Senate plan would do the same but includes an $18,000 standard deduction for single parents (head of household filers).
- Child tax credit.
- The House bill would increase the child tax credit from $1,000 to $1,600 for each qualifying child. The credit would not be adjusted for inflation, so its value would drop over time, and some tax professionals predict that the increased credit would not offset the loss of personal exemptions for many higher-income families.
- The House also includes a $300 credit for nonchild dependents, as well as a $300 “family flexibility credit” for the taxpayer (or both spouses, for a joint return). The nonchild dependent credit and the family flexibility credit would be effective for tax years ending before January 1, 2023.
- The House plan would also increase the income levels at which these credits phase out. Under current law, the child tax credit is phased out beginning at income levels of $75,000 for single filers and $110,000 for joint filers. The House plan would raise these amounts to $115,000 and $230,000, respectively.
- The Senate plan would increase the child tax credit to $1,650. It also would significantly increase the annual income threshold at which the credit begins to phase out to $1 million for married joint filers and $500,000 for single taxpayers. In addition, the Senate plan would provide a $500 credit for dependents other than qualifying children.
- Mortgage interest deduction.
- The House bill would cap the mortgage interest deduction limit at $500,000 of debt for homes purchased after November 2, 2017.
- The Senate bill would keep the current mortgage interest deduction limit at $1 million of debt.
- State and local taxes.
- The House bill would generally eliminate state and local tax write-offs but preserve a deduction for property taxes limited to $10,000.
- The Senate bill would fully repeal deductions for state and local taxes, including property taxes.
- The deduction of state and local income taxes would be repealed under both bills.
- Medical expense deduction.
- The deduction generally allows taxpayers to deduct unreimbursed medical expenses that exceed certain amounts.
- The House bill would get rid of the medical expense deduction.
- The Senate bill would retain it.
- Adoption tax credit.
- The credit for adoption expenses would have been repealed under the original House bill but a November 9 amendment eliminated the repeal.
- The Senate bill would also retain the credit for qualified expenses.
- It appears that the adoption tax credit is no longer a tax reform target.
- Enhanced standard deduction for blind and elderly taxpayers.
- The House bill would eliminate this deduction.
- The Senate plan would retain it.
- Estate tax.
- The House bill would essentially double the gift, estate and generation-skipping transfer (GST) tax exemptions to $10 million (adjusted for inflation) and eliminate the estate and GST taxes entirely after 2023. That same year, it would reduce the gift tax rate to 35%.
- The Senate bill would double the exemptions, similar to the House provision. But unlike the House, the Senate does not propose repealing the estate tax or GST tax or reducing the gift tax rate at any point.
These changes also would generally be effective beginning in 2018, but be sure to note the exceptions:
- Corporate tax rate.
- The House bill would slash the corporate tax rate from 35% to 20% beginning in 2018 — the largest one-time reduction of the corporate rate in history.
- The Senate plan also would cut the rate from 35% to 20%, but it would delay the change until 2019.
- Pass-through business tax rate.
- The original House bill called for substantial changes to the taxation of owners of pass-through entities (sole proprietorships, partnerships and S corporations), and the Ways and Means Committee passed amendments to its bill on November 9 that would complicate matters further. The House bill would tax pass-through owners on their “business income” at a maximum rate of 25%, rather than at their individual income tax rate. Those “actively involved” in their businesses would pay their individual rate on 70% of their income (which would be deemed wages) and the 25% rate on the remaining income.
- Alternatively, until 2023, these business owners would be able to apply a “facts-and-circumstances” formula that calculates the amount of their wage income based on their capital investment in their businesses. This option might be especially appealing for capital-intensive businesses. Personal services businesses (for example, law, accounting, consulting, engineering and financial services firms) wouldn’t be eligible for the 25% rate at all.
- These provisions introduce more complexity into the income tax process. In addition, the National Federation of Independent Business expressed concern that the pass-through provisions would not help most small businesses, because their income is low enough that they already pay less than 25% in taxes.
- In response to such criticism, the House on November 9 added an amendment to its bill that would provide relief to some small business owners. The amendment eventually would provide a 9% tax rate, in lieu of the ordinary 12% tax rate, for the first $75,000 in net business taxable income of an active owner or shareholder earning less than $150,000 in taxable income through a pass-through business and married filing jointly. (For single taxpayers, the $75,000 and $150,000 amounts would be $37,500 and $75,000, and, for heads of households, they’d be $56,250 and $112,500.)
- The Senate bill would provide tax relief to owners of pass-through entities by establishing a “simple and easy-to-administer deduction for pass-through businesses of all sizes.” The deduction would amount to 17.4% for certain pass-through income. The deduction would be phased out for specified service businesses whose taxable income exceeded $150,000 for married joint filers and $75,000 for other taxpayers.
- As taxable income exceeds $150,000 for married joint filers, the benefit of the 9% rate relative to the 12% rate is reduced, and it’s fully phased out at $225,000 for such filers. Businesses of all types would be eligible for the preferential 9% rate. The proposed 9% rate would be phased in over five tax years. The rate for 2018 and 2019 would be 11%. For 2020 and 2021, it would be 10%, and for 2022 and thereafter, it would be 9%.
- Depreciation of business assets.
- The House bill would allow companies to immediately expense capital investments — except buildings — acquired and placed in service after September 27, 2017, and before January 1, 2023 (with an additional year for certain property with a longer production period).
- In addition, under the House bill, the limit on Section 179 expensing for pass-through entities would rise to $5 million from $500,000, with the phaseout threshold increasing to $20 million from $2 million. These higher amounts would be adjusted for inflation, and the definition of “qualifying property” would be expanded but would not include property used in a real estate business. But the limits would be boosted for only five years, which some economists say isn’t long enough to encourage much capital investment.
- The Senate plan would also allow for full and immediate expensing of qualifying assets acquired and placed in service before January 1, 2023, though there would be some differences in which assets would qualify. The Senate bill also would increase the Sec. 179 expensing limit, but only to $1 million, and would increase the phaseout threshold, but only to $2.5 million. The higher limits would, however, be permanent (and continue to be indexed for inflation).
- Nonqualified deferred compensation amendment.
- When it was released, the House bill contained a provision that would tax an employee on nonqualified deferred compensation differently than it does now. It would essentially eliminate the ability to defer taxes beyond the vesting period. Business groups complained that the provision would mark the end of many nonqualified deferred compensation plans.
- A House amendment, which was approved on November 9, would preserve the current tax treatment of nonqualified deferred compensation.
- The Senate bill does propose significant changes to the tax treatment of nonqualified deferred compensation.
Despite all of the proposed tax reform activity, there is still a long way to go before a law is passed. The full House of Representatives plans to vote on its bill as early as this week, according to Republican leaders. Senate Finance Committee members said they will make revisions to their plan in coming weeks before crafting a formal bill to be submitted for a full Senate vote.
The House and Senate must reconcile their differences into a single bill that Republican lawmakers hope to vote on before Christmas so that President Trump can sign it by December 31. Meanwhile, lobbyists and special interest groups, as well as taxpayers, will continue to weigh in, and some Republican lawmakers have already expressed opposition to parts of the proposals.
With the significant differences between the House and Senate plans, it remains to be seen whether they will craft a unified bill that can be passed by both chambers by the end of the year.
The SKR+CO tax team is actively monitoring tax reform proposals and will continue to provide updates as new information becomes available.
If your employees incur work-related travel expenses, you can better attract and retain the best talent by reimbursing these expenses. To secure tax-advantaged treatment for your business and your employees, it is critical to comply with IRS rules.
Reasons to Reimburse
While unreimbursed work-related travel expenses generally are deductible on a taxpayer’s individual tax return (subject to a 50% limit for meals and entertainment) as a miscellaneous itemized deduction, many employees will not be able to benefit from the deduction. Why?
It is likely that some employees do not itemize. And those who do may not have enough miscellaneous itemized expenses to exceed two percent of adjusted gross income; a requirement for the excess to be deducted.
On the other hand, reimbursements can provide tax benefits to both your business and the employee. Your business can deduct the reimbursements — (also subject to a 50% limit for meals and entertainment), and they are excluded from the employee’s taxable income — provided that the expenses are legitimate business expenses and the reimbursements comply with IRS rules. Compliance can be accomplished by using either the per diem method or an accountable plan.
Per Diem Method
The per diem method is simple: Instead of tracking each individual’s actual expenses, you use IRS tables to determine reimbursements for lodging, meals and incidental expenses, or just for meals and incidental expenses. (If you don’t go with the per diem method for lodging, you’ll need receipts to substantiate those expenses.)
The IRS per diem tables list localities here and abroad. They reflect seasonal cost variations as well as the varying costs of the locales themselves — so London’s rates will be higher than Little Rock’s. An even simpler option is to apply the “high-low” per diem method within the continental United States to reimburse employees up to $282 a day for high-cost localities and $189 for other localities.
You must be extremely careful to pay employees no more than the appropriate per diem amount. The IRS imposes heavy penalties on businesses that routinely fail to do so.
An accountable plan is a formal arrangement to advance, reimburse or provide allowances for business expenses. To qualify as “accountable,” your plan must meet the following criteria:
It must pay expenses that would otherwise be deductible by the employee.
Payments must be for “ordinary and necessary” business expenses.
Employees must substantiate these expenses — including amounts, times and places — ideally at least monthly.
Employees must return any advances or allowances they can’t substantiate within a reasonable time, typically 120 days.
If you fail to meet these conditions, the IRS will treat your plan as nonaccountable, transforming all reimbursements into wages taxable to the employee, subject to income taxes (employee) and employment taxes (employer and employee).
Employers to use the New I-9 Form
The U.S. Citizenship and Immigration Services (USCIS) has released a revised version of the Form I-9 (Employment Eligibility Verification). Employees must begin using the new version to verify a new hire's identity and work authorization by September 18, 2017. In the meantime, employers have the option of using the outgoing version, which is dated 11/14/16.
What is different in the new version?
Revisions to the instructions: Relatively minor revisions, such as changing the name of the Office of Special Counsel for Immigration-Related Unfair Employment Practices to its new name, Immigrant and Employee Rights Section.
Revisions to the list of acceptable documents:
Adding the Consular Report of Birth Abroad (Form FS-240) to List C.
Combining all the certifications of report of birth issued by the Department of State (Form FS-545, Form DS-1350 and Form FS-240) into selection C #2 in List C.
Renumbering all List C documents except the Social Security card.
What is Form I-9?
Form I-9 is used for verifying the identity and employment authorization of individuals hired for employment in the United States. All U.S. employers must ensure proper completion of Form I-9 for each individual they hire for employment in the United States. This includes citizens and noncitizens.
Both employees and employers (or authorized representatives of the employer) must complete the form. On the form, an employee must attest to his or her employment authorization. The employee must also present his or her employer with acceptable documents evidencing identity and employment authorization. The employer must examine the employment eligibility and identity document(s) an employee presents to determine whether the document(s) reasonably appear to be genuine and to relate to the employee and record the document information on the Form I-9. The list of acceptable documents can be found on the last page of the form. Employers must retain Form I-9 for a designated period and make it available for inspection by authorized government officers.
NOTE: State agencies may use Form I-9. Also, some agricultural recruiters and referrers for a fee may be required to use Form I-9.
Download the New I-9 today!