2017 Year-end Planning Considerations

In light of the current tax bill that is now being debated by Congress, year-end planning for 2017 presents unique considerations for individuals and families.

It is important to note that the status of the tax proposal is extremely fluid and it is too early to make  an official determination on which direction it will take. To further complicate the matter, as of this note being published, there are two similar but distinct proposals being put forth by Republicans in both the House of Representatives and in the Senate. While we don't know for certain what the final version of the law will be, we do know that changes are coming and given these changes, there are a number of planning opportunities to be aware of prior to year-end. As always, every tax situation is different and it is best for individuals to consult their tax professional for advice. 

One of the first major proposed changes revolves around updates to the existing tax brackets. For many tax payers both bills would reduce tax rates effective for the 2018 tax year. In general, to take advantage of lower tax rates in 2018, clients could consider deferring income into next year, including year-end bonus payments and IRA to Roth IRA  conversions. 

Seven additional proposed changes to be aware of include:

  • 1. Mortgage Interest Deduction:

    Current Law: If you itemize your deductions, you are able to deduct qualifying mortgage interest for purchases of up to $1,000,000. The existing law allows for an additional $100,000 for equity debt. The $1,000,000 cap includes a mortgage on your primary residence plus one additional property.

    Proposed House Bill: Current mortgages would be grandfathered under the new law. However, new mortgages would be capped at $500,000 of principal for purposes of taking the deduction. Additionally, the deduction would only apply to your primary residence.

    Proposed Senate Bill: The deduction would remain in place for mortgages up to $1,000,000 but the deduction for equity debt (defined as refinances not related to improving your home) would be eliminated. Many of our clients and investors own their homes and deduct a significant amount of mortgage interest. This proposed change may be particularly impactful and could influence the potential of financing a future vacation home purchase vs. putting a larger percentage down. When considering new mortgages in excess of $500k, additional thought will need to be placed on the true cost of capital compared to the expected performance of their portfolio. When combining this decision with rising interest rates, new mortgages may become less appealing for our wealthier clients who otherwise have the capital available from other sources. 

  • 2. State and Local Income Tax (SALT) / Property Tax Deduction:

    Current Law: If you itemize your deductions, you are able to take advantage of deducting your state and local income taxes or sales taxes.

    Proposed House and Senate Bills: Both the House and the Senate proposals would eliminate the state and local income tax or sales deduction for individual taxpayers, while capping the state and local property tax deduction at $10,000. Given that a family in New York is very likely paying 7% (or more) of their income to the state, this may be a significant decrease in their allowed deductions, depending on their income. For clients with more than one home, there is now even more of an incentive to potentially establish residence in their homes outside of high income tax states such as NY, NJ, CT, CA, etc. There is also the possibility of making 4th quarter state tax payments before the end of the year to capture the deduction for tax year 2017.

  • 3. Capital Gains and Tax-Loss Harvesting:

    Current Law: When a taxpayer sells securities in their taxable accounts, they can specify which shares or tax lots they want to sell, helping to limit possible capital gains on the transaction. The same rule applies when gifting securities to charities.

    Proposed Senate Bill: The Senate proposal includes a change to the rules that govern "tax lot accounting" in taxable accounts. Tax lot accounting covers the tax implications for the sale of an investment when multiple purchases have been made over time. The proposed rule would require the use of a "first in, first out" (FIFO) approach to tax lot accounting, possibly triggering larger than intended realized gains for positions that have significantly appreciated.

    Proposed House Bill: The House proposal does not include this provision so it is uncertain what will happen.

    We do not see those strategies becoming any less important based on these changes. In fact, if investors do end up losing some flexibility in how they manage their tax lots, the benefits of carefully managing realized gains may increase. Gifting stock to charity could now become even more appealing following the proposed changes. Presuming that the oldest lots of securities held would have the lowest basis, then our clients could strategically gift the earlier lots to preserve the higher cost basis lots for future sales. Our clients may also select certain lots to sell in 2017 while they still have the opportunity to make that decision.

  • 4. Charitable Donation Deduction:

    Current Law: If you itemize your deductions, you can deduct certain donations to qualified charitable organizations.

    Proposed House and Senate Bills: Under both bills, the charitable donation deduction would remain in place.

    Additional Senate Proposal: There is verbiage in the Senate bill which indicates an increased limitation for certain charitable contribution deductions to 60% of the taxpayer's contribution base for such year. Since the standard deduction would be greater, clients with more modest incomes are less likely to benefit from smaller denomination charitable gifts. Since 2018 tax payers may have less opportunity to itemize deductions, consider front-loading gifts into a Donor Advised Fund or speeding gifts up to 2017.

  • 5. Federal Estate Tax:

    Current Law: The estate tax exemption is $5,490,000 for taxpayer with portability to spouses.

    Proposed House and Senate Bills: Both the House and the Senate proposal would roughly double the federal estate tax exemption to $11 million per person or $22 million per couple.

    Additional House Proposal: The House plan would go further, removing the tax completely by 2024. Beneficiaries would still get a step-up in basis at death, meaning there would be no capital gains tax due on inherited assets at the time of the transfer.

    There are no indications how each State will react to the federal estate tax exemption level. Estate planning on a state by state basis will remain an important aspect for our clients to have a current estate plan that helps ensure their wishes are carried out and reduces the cost of transferring assets as part of an estate. In light of the proposed doubling of the federal estate tax exemption, some individuals/ families who've positioned life insurance as a vehicle to fund an impending estate tax liability, may potentially find themselves "over-insured", and thus should re-evaluate their policies and ultimate insurance need. It is important to note that estate planning is also about establishing goals and objectives, not just avoiding estate taxes. It will remain an important part of what we do.

  • 6. Alternative Minimum Tax:

    Current Law: AMT intends to prevent high-income individuals from avoiding paying income tax by having significant amounts of deductions. It is essentially a parallel method for calculating your income tax liability to ensure a minimum (27%-28%) effective tax rate is paid.

    Proposed House Bill: Under the House plan, they'd eliminate the AMT for individuals.

    Proposed Senate Bill: The Senate plan would retain it, but with changes designed to limit the impact of the tax. The Senate plan would raise the minimum income level at which the AMT could apply, from $50,600 to $70,600 for individuals and from $78,750 to $109,400 for couples married filing jointly.

  • 7. Alimony Received / Paid:

    Current Law: Those paying alimony can claim the amounts paid as an above-the-line deduction, while those receiving the payments report it as ordinary income.

    Proposed House Bill: The House plan calls for eliminating the tax deduction for the payer and making alimony tax-free for the payee going forward for new divorce/alimony agreements.

    Proposed Senate Bill: The Senate plan calls for leaving the current plan as is.

Please keep in mind that we've described only some of the year-end considerations in light of the tax reform package, which to re-emphasize, may or may not become a law. There are in fact many more items that stand to be updated in both plans. Both bills put forth changes to the following: standard deduction and personal exemptions, medical expense deductions, other itemized deductions, above the line deductions, 529 plans, education incentives, corporate and pass-through tax rates and equipment expenditure, to name a few.


If you would like more details about any aspect of how the proposed legislation may affect you, or how we can work with you to adjust your plan accordingly, please do not hesitate to call. 

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People's United Wealth Management helps institutions, employers, individuals and their families navigate investment, trust, retirement, banking and planning challenges. Our experienced professionals work as a team, bringing specialized knowledge and solutions to the conversation.

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