Tax Overhaul Is Planned for 2018, Leaving Just a Few Weeks to Prepare
Most provisions in the House and Senate GOP tax bills would take effect in 2018, meaning people could have little time to do crucial year-end tax planning
Most provisions in the Republican tax bills would take effect in 2018, assuming a bill passes.
By Laura Saunders
Nov. 10, 2017 7:00 a.m. Fewer tax breaks for homeowners. No deduction for state income taxes. A higher bar for charitable write-offs. No “personal” exemption. No alternative minimum tax.
Republican leaders in the House and Senate have proposed different bills to overhaul the tax code, but both sweep away or limit many tax breaks for individuals in a bid to boost economic growth and simplify the system.
Both bills also expand credits for children. They increase the “standard deduction” greatly, so that perhaps 30 million filers wouldn’t need to break out deductions separately. Many business owners would get a tax break and owe less than wage earners with similar income. The estate-tax exemption would double, to $10 million a person.
There are so many differences between the two bills that exact outcomes are hard to predict, assuming a bill passes. What is clear is that people could have little time to do crucial year-end tax planning. Most provisions would take effect in 2018.
Here are tax moves to consider, based on current proposals.
Home Buyers and Sellers
The Senate bill preserves current law allowing deductions on a total of $1 million of mortgage debt on up to two homes.
The House bill would allow home buyers taking out mortgages after Nov. 2 to deduct interest only on $500,000 of debt, and only on one home. It appears to prohibit mortgage-interest deductions for all second homes. Both bills end interest deductions for home-equity loans.
If the House version prevails, the Nov. 2 cutoff might be extended in a nod to the Senate. But there are no guarantees, so buyers should beware.
Both bills also restrict the popular exemption of $500,000 of profit on the sale of a first home ($250,000 for singles). The new rules would require sellers to live in a house for five of the prior eight years, rather than two out of five years, to get the benefit.
The House bill reduces the exemption for sellers whose income exceeds $500,000 ($250,000 for singles). Affected home sellers should complete sales before year-end.
Both bills cut taxes on some income earned by so-called pass-through firms such as partnerships and S corporations, but the rates and categories of business owners who would benefit differ.
Stay tuned as the final provision becomes clear. Business owners who would benefit from a lower rate may want to defer income into 2018, says Chris Hesse, a certified public accountant with CliftonLarsonAllen.
The House bill repeals the deduction for state and local income and sales taxes and caps the deduction for property taxes at $10,000. The Senate bill repeals deductions for property taxes, in addition to repealing the others. Exceptions apply for property-sales taxes paid by owners of pass-through firms.
Individuals who won’t owe alternative minimum tax this year may want to prepay 2018 state and local taxes that could be disallowed next year. This move requires careful analysis, as high state and local tax deductions could trigger the AMT in 2017 and eliminate much of the benefit.
If the standard deduction greatly increases as proposed, only 10% of filers will need to list write-offs separately compared with 30% now. Taxpayers donating a small percentage of income may want to accelerate donations into 2017 to get a deduction.
These givers should also consider so-called donor-advised funds. Such accounts enable donors to “bunch” several years of smaller gifts into one large amount. A donor can designate charitable recipients later, and meanwhile the assets can be invested and grow tax-free.
Get your Tesla, Chevy Bolt, or similar plug-in vehicles before year-end. The House bill repeals a credit of up to $7,500.
The House bill repeals the deduction for medical expenses, which is highly important for people paying large bills for home health aides and nursing-home care. The Senate bill retains it.
Tax professionals caution against prepaying 2018 medical expenses in 2017. The law allows the IRS to disallow such write-offs entirely, and courts have ruled against the taxpayer on this issue.
There is an exception for some people entering retirement homes. Under current law, part of the entrance fee to such facilities could be deductible for 2017 even if the person doesn’t enter until 2018, says Andy Mattson, a CPA with Moss Adams. This is a complex area, and taxpayers should seek professional help.
Employee Stock Options
Workers who have Incentive Stock Options (ISOs) may benefit if they wait to exercise them until 2018, says Scott Kaplowitch, a CPA with Edelstein & Co. ISOs can trigger the alternative minimum tax, which both bills would repeal.
Sign divorce or separation agreements that include alimony before the end of 2017. In the House bill, alimony ceases to be deductible by the payer in 2018.
Carlyn McCaffrey, an attorney with McDermott, Will & Emery, says that for a top-bracket spouse required to provide $250,000 of tax-free income to a bottom-bracket spouse, the tax savings from signing an agreement in 2017 compared with 2018 would be about $43,000.
Write to Laura Saunders at firstname.lastname@example.org