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Senate passes tax reform bill

Early Saturday morning, Republicans passed – by a thin margin – the Senate’s version of tax reform. Although this is a significant step forward towards actual legislation, the House and Senate still must reconcile their differences before a bill can be sent to President Trump for signature into law.

With all that in mind, below are a few ideas to consider during year-end tax planning:

Lower Individual Tax Rates

Depending on an individual’s annual income and which rates the House and Senate agree on, there is a good chance many taxpayers may end up paying a lower tax rate in 2018. Consider, when possible, deferring bonuses and other items of income.

Itemized Deductions

With the increased standard deduction and proposed elimination of several itemized deductions, it may be advantageous to accelerate certain payments before year end.

A few items to consider:

  • State and local income/sales tax: Under both proposals, the state and local income/sales tax deduction would be eliminated. Consider making any 4th quarter state estimates or anticipated payments due in April by December 31, 2017. Also, for states without an income tax, consider purchasing any “big ticket” items by year end to take advantage of the sales tax deduction.
  • Charitable contributions: Both proposals call for doubling the current standard deduction. This would result in greater than 90 percent of taxpayers choosing the increased standard over the itemized deduction. Consider making any anticipated charitable contributions by December 31, 2017.

Lower Corporate and Pass-through Tax Rates

Although accelerating deductions and deferring income should always be part of prudent tax planning, the potential for a significant rate cut in future years makes these strategies even more impactful than usual.

Both proposals call for decreasing the corporate tax rate to 20%, down significantly from our current 35% top rate (House bill effective 2018, Senate bill effective 2019). Both proposals also include language that would effectively reduce the pass-through rate paid by partnerships and S-corporations. With these proposed tax rate cuts, any normal timing deduction accelerated (or income deferred) would result in a permanent benefit. For example, a corporation that properly accelerates a deduction in 2017 would receive a 35% benefit in the current tax year versus a 20% benefit in 2018 under the House bill.

A few items to consider:

  • Identify and review accounting methods that may result in accelerating deductions and deferring income
  • Consider a cost segregation study to reclassify and reduce depreciable lives on segments of real property
  • Accelerate planned repairs and maintenance expenditures

Other Significant Changes

  • Both proposals call for immediate expensing of eligible fixed asset purchases and increased Section 179 expensing
  • Although eliminated in the House proposal, the alternative minimum income tax would be retained with higher exemptions under the Senate’s bill
  • The child tax credit would be raised from $1,000 to $1,600 under the House bill and $2,000 under the Senate bill
  • The estate tax would be repealed in 2024 under the House proposal but retained with a higher unified credit under the Senate’s bill
  • The requirement for individuals to maintain minimum essential health care coverage under the Affordable Care Act would be repealed under the Senate proposal

Significant aspects of the house and senate versions are compared here. To discuss tax reform or any aspect that may be of interest to you, please contact your Rehmann advisor.

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