2017 Tax Act

Tax Brackets:

Tax brackets are 7 in number, and the rates for most taxpayers are reduced. Lowest is 10% highest is 37%.

The top marginal rate for individual taxpayers was reduced to 37%, but the threshold of income to which the rate applies was dropped from $1M to $600,000 for taxpayers that are Married Filing a Joint return (MFJ). These rates do not apply to tax years beginning after December 31, 2025.

Small Business

The pass-through income deduction was reduced from 23% to 20% and retains the limitations on specified service businesses, with a reduction on the levels of income that could qualify to $315,000 MFJ and $157,500 for an individual taxpayer filing Single. The Explanatory Statement issued with the bill provides, “the conferees expect that the reduced threshold amount will serve to deter high-income taxpayers from attempting to convert wages or other compensation for personal services to income eligible for the 20-percent deduction”. THIS WILL NOT AFFECT THE SELF-EMPLOYMENT TAX, BUT WILL CLEARLY IMPACT YOUR BOTTOM LINE. THIS IS EFFECTIVE STARTING IN 2018.

However, S Corporation owners will now face reductions in this deduction if they were not paid reasonable compensation.

Corporate rates:

The corporate tax rate is reduced from 35% to 21% with no special rate for personal service companies and no expiration of these provisions. In addition, the corporate alternative minimum tax (AMT) is repealed.

The bill retains the full ability to expense qualified property acquisitions (not including structures) of new and used property placed in service after September 27, 2017 and before January 1, 2023, with a phase down by 20% per year for property placed in service after December 31, 2022 and before January 1, 2026.

All entertainment related expenses will be fully disallowed for amounts paid or incurred after December 31, 2017.

The 50% deduction for food and beverages is maintained, and expanded to include expenses of the employer associated with providing meals to employees through an eating facility that meets the requirements for minimum fringes and for the convenience of the employer. After December 31, 2025, these amounts will no longer be deductible. Business owners will now have to ensure that caterers and restaurants where parties are held qualify.

Individual Deductions and Credits

Individuals receive a larger standard deduction of $12,000 (single) and $24,000 (join) and $18,500 for head of household. These are doubled for elderly. Thus, a person over the age of 65 can receive an exemption of $24,000 (single) and $48,000 for a couple. However, you lose the exemptions of $4,050 per person.

Child Tax Credit will be enlarged to $2,000 (with maximum of $1,400 for more than one child). Children who qualify are 17 and under. Qualifying income levels are raised from $75,000 for single taxpayers to $200,000 and $110,000 for married to $400,000 for married. This credit is refundable. There is a non-refundable credit of $500 for non-child dependents. To qualify for the full credit the child must have a social security number (not an ITIN).

Fewer will need to itemize, and there are some huge changes in deductions.

No more casualty or theft losses unless you are in a disaster area declared so by the President.
No more Miscellaneous itemized deductions. That means payment to your tax preparer, or for investment guidance or for that safe deposit box are not longer going to be deductible.
Reduced state and local tax deductions to a cap of $10,000 combined. Individual taxpayers will be allowed to deduct state income, property and sales taxes, up to an aggregate cap of $10,000 ($5,000 for a married taxpayer filing a separate return). This cap expires for tax years beginning after December 31, 2025. The bill also makes clear that the prepayment of any state income taxes related to a year beginning after December 31, 2017 will not be deductible in 2017.

The deduction for mortgage interest will be limited to mortgages not exceeding $750,000 for new mortgages incurred after December 31, 2017. For mortgages incurred prior to that date, the limitation is $1M ($500,000 in the case of married taxpayers filing separately). The interest expense deduction for home equity loans has been suspended for tax years beginning after December 31, 2017. The suspension will lift for tax years beginning after December 31, 2025.

Alimony will not longer be deductible nor will it be income to the spouse receiving it.

The individual exclusions and phase-out thresholds for Alternative Minimum Tax are increased, but neither is fully eliminated in the final bill.

Depreciation

Useful lives for calculation have been compressed.
Greater ability to write off entire purchase at time of purchase.

Estate and Gift Taxes

The estate and gift tax exemption is doubled to $10MM (indexed for inflation) for estates and gifts made after December 31, 2017 and before January 1, 2026. This allows $20mm per couple.

POSSIBLE 2017 STRATEGIES:

1. Defer income to 2018.
2. Pay Tax preparer early for 2018 tax return. (Don’t think you should try for years further out).
3. Pay 2018 real estate taxes before 2018.
4. Pay your state estimated taxes before 1/1/18.
5. Buy a new home.

YEAR END STRATEGIES WITH A TAX BILL LOOMING

So, you have two versions of a tax bill, its in conference committee and if history tells us anything, you’ll never know what will come out of it. However, we know a few things that MAY happen. It is highly doubtful that any bill will be effective for tax year 2017.
1. Removal of state income tax deduction. While there may be transitional rules, this is Congress’s chance to give high tax democrat states a big razzberry. So, if you can do so, it would be advisable to pay your 2017 state estimated tax before 12/31/17. That way if the state income tax deduction is repealed for 2018, at least you get a deduction in 2017. And who knows the refund may not be deductible under the new act.
2. If you live in a state with no income taxes, make that large purchase now. The sales tax deduction may not be there in 2018. There are usually great deals the last week of the year at car dealerships who have to pay personal property tax on inventory held on 1/1.
3. Defer any sales of stock if you don’t have to do so. With potential repeal of AMT and lowered capital gains rates, it makes sense to defer.
4. Go see the doctor or dentist in 2017. If you have something that will require a large co-pay (like tooth implants), get it done in 2017 while you still have a deduction.
5. Use Qualified Charitable Donation out of your retirement plan for 2017 it might not be around in 2018.

Adkins v. United States

Your author was lead counsel on the above case argued before the Court of Appeals in the Federal Circuit. The Federal Circuit ruled that the regulations regarding Section 165 theft losses. In particular the Court ruled that the regulations section dealing with reasonable likelihood of recovery and reasonable certainty that recovery would not be forthcoming have to be read together if the deduction is in the year following the year of loss. The trial court had a more bright line rule that all proceedings had to be abandoned prior to allowance of the deduction. The link to the opinion is attached hereto.

http://www.cafc.uscourts.gov/sites/default/files/opinions-orders/16-1961.Opinion.5-5-2017.1.PDF

TRUMP’S TAX PLAN

Of course, I haven’t seen one word of the statute proposed, but there are some interesting things in this plan. (1) Lowering Corporate rates and repatriation tax, evening out small business income rates to lower their rates. This is not trickle down if they also attack the huge tax penalty on small businesses. Currently an LLC has a maximum effective rate of 39.6% and unlike large corporations, profits cannot be deferred easily. Also many times this income is subject to self-employment taxes to the effective rate would be closer to 48% plus state taxes. So, obviously the devil is in the details, but this could be a huge benefit for jobs if done. (2) Eliminating deductions. This will have a negative impact on middle income taxpayers in the following ways. Tax deductions (except for Mortgage interest and charitable) will be eliminated. This effectively increases income and property taxes for the amounts taxpayers pay to the States. This may make people pay more attention to the amounts being paid to their states and localities and put some pressure on the states and localities to reduce taxes themselves. This eliminates employee business expenses which means that those deductions for workers who have to buy tools or uniforms will be hit. This also eliminates medical deductions. So, if mom is in a nursing home and having to pay $100,000 a year in long term care expenses, she will not be able to deduct it under this plan. I suspect this will be one area that gets some pushback from Congress. (3) Capital gains rate reduction and elimination of 3.8% surtax on unearned income is geared toward higher income taxpayers. (4) Elimination of estate taxes is popular with Farmers and Small to medium sized businesses whose values are close to $10 Million. So, we’ll wait for the details. But some interesting proposals for sure.

Estate Taxes and those pesky Pay on Death Accounts

Let’s say granny wanted to avoid probate and also keep her FDIC insurance exposure low and ran around to fifty banks buying CD’s and names children and grandchildren as pay on death beneficiaries of each account. There is no will and no probate of her estate and no executor qualified.

So, one of the POD beneficiaries figures out that granny was maybe worth over $5 Million and there is a necessity to file an estate tax return.

So he goes to Head in the Sand Credit Union and asks for details of any CD’s owned by the decedent and even gets his siblings to give him a notarized permission to find out the information in the accounts.
HITSCU says, “no way” we cannot accept that permission slip and we have to follow our own procedures and protect their privacy.

This little cautionary tale, points out the problem with pay on death accounts. Yes, they avoid probate, but they also create a mess in trying to locate the decedent’s assets when there may be an estate tax due. In such situations a revocable trust is more beneficial as the owner and provides more centralized control of the assets if granny wants to avoid probate.