Enclosed are some of the tax law changes that would affect many taxpayers’ pocket book. The enclosed proposals, Congress’s Framework, would affect not just the high net worth or high income taxpayers. Given the possibility of tax law changes would be passed in 2018 tax year, consider these year-end plans.
- Elimination of Itemized Deductions and “lower and less” tax brackets.
Consider more detailed analysis to time gains and losses for 2017. A preferable approach would be to accelerate losses and deductions and defer gain and ordinary income until next year.
If you live in a high tax state, consider paying state and local income taxes this year ahead of tax changes in 2018. Taxpayers in high tax states such as California and Connecticut may be encouraged to establish Incomplete Non-Grantor Trusts known as NINGs in Nevada. These trusts are structured so that the beneficiaries who live in high tax states benefit by lowering their overall tax burden. The state of New York has disallowed these trusts recently. The New York tax authority will tax these trusts as though they are domiciled in their state.
- Repeal of the Alternative Minimum Tax (AMT).
With a repeal of this tax, the AMT carryforward credit on tax paid on the exercise of Incentive Stock Options (ISO) and executives with restricted stock that cannot liquidate (in the black zone) would lose their AMT credit in the event that they sell their exercised ISO stock.
Executives who are thinking exercising ISOs may wish to review their plan for 2017 and 2018. With a change in the tax brackets to 15%, 25%, and 35%, holding on exercise of ISOs may be a plan to consider.
- Education Planning and Section 529.
If the Section 529 Education Plans are eliminated, December 31, 2017 would be the last day to fund these plans for education. There may be urgency to fund by the end of the year if there is no grandfathering (gradual phase-out) of these accounts.
- C Corporation tax rate reduction:
If the top tax rate is reduced from 39.6% to 25% for most pass-through companies (partnerships and S Corporations), the new bill will try to prevent reclassification from these entities to C Corporations. C Corporations new top rate of 20% would be enticing to reclassify the companies to C Corporations. The Congress will attempt to prevent these tactics.
- Rothification! – Recently taken off the negotiation table…but wait!
The proposal would have required some taxpayers to convert their traditional IRAs or defined-contribution plans to ROTH IRAs. This change would be a tax increase. The discussion this past summer in the tax proposal framework was discussed as a way to tax rate reductions and provide simplification. For more information, see Stephanie Cumming’s article, “Rothification’ Uncertainties Draw Concern from Industry,” May 30, 2017.
As of this writing, lawmakers have removed the item on the bill framework. This idea has been discussed in recent years, and in our view, will be brought up in the future… beware.
If you are likely to be affected by these proposed law changes, we would welcome a discussion with you for an action plan before the law changes, especially if a law passes in December 2017. Without adequate planning, it may be difficult to learn how the new law would affect you and how you should react to it.