One of the major changes, in both the Senate and the House tax reform bills, is in the area of Itemized Deductions. These changes include new standard deduction amounts which almost double the current amounts and the elimination of at least some state and local tax deductions and possibly the elimination of the Medical Expense Deduction.
I did some analyses of our clients’ deductions from their 2016 returns and found that, if there is no change in their deduction amounts from 2016, in 2018, up to 75% of those who itemized in 2016, will not be able to itemize in 2018.
Over half of those losing the ability to itemize are due to only the higher standard deduction amounts, and a third of them are due to the reduction in deductible state and local taxes and the rest would be due to the possible elimination of the Medical Expense Deduction.
Therefore, I would advise you to maximize your 2017 deductions where you can, as you may not be able to benefit from them in 2018.
--You can accelerate deductions into 2017 by paying items that you may normally pay in 2018. You must actually pay for items in 2017 that you want to deduct in 2017, with the exception that the IRS recognizes an item as being paid for on the day you charge it to your credit card.
--State and local taxes that can be paid in 2017 include state and local income tax estimated payments and real estate taxes. You can pay your 2018 first half and even your second half real estate tax bill in December 2017. However, this idea will not help you if you are subject to the Alternative Minimum Tax (AMT) in 2017.
--You can make contributions in 2017 that you normally would be making in 2018. Also, the reform is expected to include a change to capital gains rules that says if you have purchased multiple lots of the same stock, when you sell or gift part of your stock holding you will no longer be able to select which lot you are selling, but instead, must use the cost of the oldest stock first (FIFO). So, gifting stock will save you tax on the capital gains.
--Not only are there lower tax rates in line for 2018 but there is another provision which will save taxes on high income in 2018. The impact of the AMT will be reduced or possibly eliminated in 2018. The most common items which trigger the AMT are a large amount of state and local taxes and of unreimbursed business expenses on Schedule A, both of which are being drastically reduced or eliminated as Itemized Deductions in 2018. So, deferring income until 2018 will be especially beneficial to the AMT crowd.
--Overall it makes sense to minimize your 2017 taxable income and maximize your 2018 taxable income because of the overall lower tax rates expected in 2018. So use these strategies to get more benefit from your deductions in 2017 and a lower tax rate on higher 2018 income.
When the tax reform is finalized we will have more info for you on how to best benefit from the new rules.
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