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The House and Senate have each passed different versions of the Tax Cuts and Jobs Act. Both bills have a lot in common, including cuts in the corporate tax rates, elimination of a number of tax deductions and changes to the estate tax. Both bills lower the US corporate tax rates and move the United States to a “territorial” dividend exemption rather than a “worldwide” system of international taxation. The House bill replaces the current seven tax brackets with four brackets (highest bracket of 39.6%) while the Senate bill keeps the seven brackets but changes the tax rate in each bracket (highest bracket of 38.5%). Both bills (a) provide a reduced tax rate for pass through entities (partnerships and S corporations) under limited circumstances, (b) increase the individual standard deduction, (c) change the state and local tax deduction, and (d) increase the child tax credit. The House and Senate have to reconcile the two versions of the bills in a conference committee and then pass the final version of the bill in both the House and the Senate. 

As the US Congress is working on tax reform, below are some of the tax planning strategies that are worth considering. The goal is to minimize tax liability both for 2017 and 2018.

Please remember that everyone’s tax situation is different and we would encourage you to call us to determine whether any of these or other tax planning strategies would be right under your circumstances.

Retirement Plans

The maximum IRA contribution is $5,500 (plus $1,000 if you are over 50 before the end of 2017). Consider making non-deductible contributions if you are not eligible to make a contribution to a Roth IRA or a deductible IRA.

Maximize your contributions to 401(k), 403(b) or 457 plans. Participants are permitted to defer up to $18,000 in 2017 and $18,500 in 2018 (plus an additional $6,000 if eligible for catch-up contributions). Your employer may match some of your contributions.

For owners of small businesses, a Defined Contribution Retirement Plan with a 401(k) could be set up so that the key people get a large percentage of the total contribution. The maximum annual addition is $53,000 for 2017 ($59,000 if you are eligible for catch-up contributions). If a similar plan is not set up for your business, please call us to review the options.

Roth Contributions/Conversions

If you are not eligible to contribute to a Roth IRA, you should consider contributing to a nondeductible IRA and then convert the amount to a Roth IRA. However, if you have other IRA accounts, this conversion may be partially taxable. Please call us to discuss if this would apply in your tax situation.

Medicare Taxes

An additional 0.9% Medicare Hospital Insurance tax may apply to wages/self-employment income of individuals and an additional 3.8% Medicare tax on net investment income including interest, dividends, annuities, royalties, rents, capital gains, etc. for adjusted gross income in excess of specified thresholds.  This tax is not applicable to income from self-owned property rented to your trade or business.

For owners of S corporations there is a tax planning opportunity of splitting the income between wages, which are subject to Medicare tax and distributions which are not subject to this tax.

Rental Income Exclusion

Rental income from your primary or second home for less than 15 days is tax-free.

Income Deferral and Accelerate Deductions

In general, it is advantageous to defer income to a subsequent year and accelerate deductions into the current year. However, if you expect to be in a higher tax bracket in 2018, it may be beneficial to accelerate income to 2017 and delay deductions to next year.

Section 179 Depreciation and Bonus Depreciation

The Section 179 deduction of $510,000 can be used to expense new or used business assets purchased and placed in service in 2017. This deduction has some limited application for an SUV (Sports Utility Vehicle) weighing between 6,000 and 14,000 pounds and used more than 50% for business.

50% bonus depreciation for new business assets is effective for tax year 2017 but phases down to 40% in 2018.

Business Vehicles

In case of a trade-in of a business vehicle at the time of buying a new vehicle, IRS rules dictate that the “tax basis” of the old vehicle should be rolled into the cost of the new vehicle. No gain or loss is recognized at the time of purchase. However, in situations where the tax basis is in excess of the trade-in value, it may be beneficial to sell the old vehicle so as to recognize the loss.

Kiddie Tax

A dependent child’s income may be subject to tax at the parent’s marginal tax rate on the child’s unearned income in excess of $2,100.  The kiddie tax includes dependents under 18 years of age or under 24 years of age if a full time student.

If not subject to kiddie tax, consider taking advantage of the 0% capital gains tax rate by transferring appreciated property to your children. Consideration would have to be given to gift and estate tax consequences.

Health Savings Accounts (HSA)

Discuss with health insurance providers to see if they offer a high deductible policy that qualifies for an HSA. The 2017 contributions limits are $6,750 for a family policy and $3,400 for a single policy. Each spouse can contribute an additional $1,000 if they are at least age 55. Contributions to these accounts can be used as a vehicle for long term tax-free growth and the withdrawals will not be taxable if they are used to pay medical expenses. However, HSA distributions used for other purposes may be subject to additional taxes.

Flexible Spending Accounts (FSA)

Employer-sponsored Flexible Spending Accounts permit you to pay qualified medical expenses on a pretax basis thus reducing your taxable income. Please discuss with your employer to see if this option is available to you.

Family Members as Employees

Consider shifting income to a child or other family member in a lower tax bracket by employing them in your business. Employing your spouse in the business also provides an opportunity to deduct business travel costs, increase contributions to retirement plans and claim child care credit. For unincorporated businesses where the children are working in the business, payroll payments to children (under age 18) of the taxpayer may not be subject to FICA tax.  In addition to a standard deduction, a child with earned income can contribute up to $5,500 of earned income into a traditional or Roth IRA.

Household Employees

If you hire individuals for various household work you would need to determine from a tax perspective whether these individuals are considered independent contractors or employees. If you pay a household employee more than $2,000 in 2017, you could be liable to pay Social Security and Medicare taxes for that individual when you file your personal 2017 income tax returns.

Capital Gains and Losses

Review your taxable investment portfolio for potential gains and losses in 2017. Consider offsetting capital losses with capital gains in your taxable investment portfolio. Capital losses are fully deductible against capital gains and an additional $3,000 only against ordinary income. Any excess capital losses are carried forward and offset against future income.

If you are in the 10% or 15% income tax brackets, long term capital gains may be tax-free subject to certain limits.

Required Minimum Distributions (RMD)

For those who turned 70 ½ in 2017 you should consider taking this year’s distribution before December 31, 2017. Alternatively you could wait until April 1, 2018, but that would require you to take two distributions in 2018. The combined tax liability of 2017 and 2018 should be reviewed when making this decision.

Deductions

In case you have paid business expenses from your personal account, claim reimbursement from your business account. Please make sure to keep supporting documents with your business records.

Charges on a credit card in 2017 are deductible on the 2017 tax return even though the payment to the credit card company will be made in 2018.

Automobile and entertainment expenses

The Tax Court has repeatedly held that vehicle expenses will be disallowed in full unless the taxpayer satisfies strict substantiation requirements which include a contemporaneously completed daily mileage log, with notation regarding person visited and the business purpose of the visit.

Meal and entertainment expenses need to be documented by noting who the taxpayer was with, where and when the event took place and what business purpose was served.

Alternative Minimum Tax (AMT) Triggers

Although expenses paid/deemed paid during the year reduce your regular income tax, they could still result in the payment of alternative minimum tax (AMT), a separate tax system. A few of the expenses that could trigger AMT are (1) large deduction for state income taxes and real estate taxes (2) large deduction for unreimbursed employee business expenses (3) interest on mortgage not used to buy, build or improve your home.

Donations

Increase your deductible charitable contributions for the year by using a credit card to make a tax-deductible donation in 2017 that you can pay in 2018.

Instead of donating cash, consider appreciated publicly traded securities held for more than one year. You would be entitled to a charitable deduction for the market value of the securities and not have to pay tax on the capital gains.

Section 529 Qualified Tuition Program

Consider funding a Section 529 Qualified Tuition Program (QTP). Contributions to the QTP are not tax deductible but distributions are tax free if they are used to pay qualified education expenses at most post-secondary educational institutions.

Mutual Funds

Invest cautiously in mutual funds in your taxable accounts at the end of the year. Many funds make distributions towards the end of the year which would be taxable to the investor, unless the investment is held in a tax-sheltered account.

Estate and Gift Tax

If gifting is part of your estate and income tax planning, utilize the 2017 annual exclusion of $14,000 by making the gift before December 31, 2017. Any tuition costs paid directly to the school for a child’s or grandchild’s tuition, and amounts paid to the provider for medical expenses, do not count towards the annual exclusion. If you are paying graduate school costs for a child by selling stocks in a taxable portfolio, gifting the stocks instead to the child may save taxes.

Establishing a Roth IRA for young children/grandchildren has many advantageous if they have earned income. If the children do not want to invest their own money, consider gifting them the amount they are eligible to contribute to the Roth IRA.

It is advisable that your estate plan be reviewed periodically. Please call us if you would like us to assist in setting up or updating your estate plan.

Foreign Income, Foreign Investments and Bank accounts

All US taxpayers are subject to tax on their worldwide income. Also foreign direct investments held by the taxpayers require additional reporting and compliance. These require two common forms: (1) FinCen Form 114 – Report of Foreign Bank and Financial Accounts (FBAR), and (2) Form 8938 – Statement of Specified Foreign Financial Assets. The definition of foreign assets is very broad and includes ownership in foreign entities, brokerage accounts etc. Since the penalties, both civil and criminal, for not complying with these disclosure requirements are very steep, please make sure to compile the necessary information as required to comply with this requirement.

Worker Classification

IRS is continuing its ongoing reviews of worker’s classification between independent contractor and employee status. Both Federal and Massachusetts state law have a very broad definition of “employee” and you should review the current independent contractors in your business to ensure proper classification. Any independent contractor who feels that he/she was misclassified by the taxpayer could file Form 8919 with their federal income tax return to report such misclassification. This could result in a potential audit by the IRS on this issue and could prove to be expensive for your business. In certain instances the IRS has pursued criminal liability against the “employer” business owners.


Small business taxation, corporate tax rates, and changes to popular deductions are just some of the many complex changes to the Tax Code being debated in Congress. At the time this article was posted, the Senate is expected to approve, along party-lines, a sweeping overhaul of the Tax Code written by Senate Republicans. The House has already approved its tax bill, also along party-lines. If the Senate passes a tax bill, House and Senate conferees will seek to resolve differences between the two bills. Conferees will likely aim to reach an agreement quickly to send a bill to the White House before year-end.


As an economic incentive for individuals to save and invest, gains from the sale of capital assets held for at least one year unless offset by losses, as well qualified dividends received during the year, may be taxed at rates lower than ordinary income tax rates. The tax rate on long-term capital gains and qualified dividends for individuals is 20 percent, 15, percent, or 0 percent depending on their income tax bracket.


Information reporting has become a growing part of IRS’s enforcement and compliance strategy. Data matching, or even the inference that the IRS has the data to do so, statistically has increased overall income reporting nine-fold. Use of information returns, either in the form of Forms W-2, 1098s or 1099s, is here to stay, and growing.


Life insurance proceeds are received tax-free. However, any interest earned on life insurance proceeds, usually referred to as its cash value, is subject to tax. Special rules apply to transfers of ownership in a life insurance policy, accelerated death benefits, and viatical settlements.


The method and systems by which a taxpayer calculates the amount of income, gains, losses, deductions, and credits and determines when these items must be reported, constitute the taxpayer's method of tax accounting. Although the Tax Code and the regulations authorize the use of several accounting methods, and permit certain combinations of methods, a taxpayer must use the accounting method on the basis of which the taxpayer regularly computes book income. Further, the method must be used consistently and must clearly reflect income.


As an individual or business, it is your responsibility to be aware of and to meet your tax filing/reporting deadlines. This calendar summarizes important federal tax reporting and filing data for individuals, businesses and other taxpayers for the month of December 2017.


Everybody knows that tax deductions aren't allowed without proof in the form of documentation. What records are needed to "prove it" to the IRS vary depending upon the type of deduction that you may want to claim. Some documentation cannot be collected "after the fact," whether it takes place a few months after an expense is incurred or later, when you are audited by the IRS. This article reviews some of those deductions for which the IRS requires you to generate certain records either contemporaneously as the expense is being incurred, or at least no later than when you file your return. We also highlight several deductions for which contemporaneous documentation, although not strictly required, is extremely helpful in making your case before the IRS on an audit.


The number of tax return-related identity theft incidents has almost doubled in the past three years to well over half a million reported during 2011, according to a recent report by the Treasury Inspector General for Tax Administration (TIGTA). Identity theft in the context of tax administration generally involves the fraudulent use of someone else’s identity in order to claim a tax refund. In other cases an identity thief might steal a person’s information to obtain a job, and the thief’s employer may report income to the IRS using the legitimate taxpayer’s Social Security Number, thus making it appear that the taxpayer did not report all of his or her income.

The Foreign Account Tax Compliance Act (FATCA), enacted in 2010, requires certain U.S. taxpayers to report their interests in specified foreign financial assets.  The reporting requirement may apply if the assets have an aggregate value exceeding certain thresholds. The IRS has released Form 8938, Statement of Specified Foreign Financial Assets, for this reporting requirement under FATCA.

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