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L.K. Benson Tips from the Pros tax reform

Tax Reform Moves Closer to Reality and Capital Gain Distributions Incoming

Thanks to L.K. Benson for this issue of Tips from the Pros.

Last Friday night the Senate passed a tax reform bill that would bring sweeping changes to our income tax system for individuals and corporations. The House of Representatives had already passed a similar bill earlier in November, and now the reconciliation process has begun. While significant differences between the two bills remain (see here for a good summary), there are enough similarities that we believe the odds are high that a compromised version of the bill will be signed into law before the end of the year. Unfortunately, you won’t have much time after the bill is passed to determine exactly how it will impact your own situation and implement any tax planning strategies before year end. However, we do think there are some things everyone should be thinking about doing right now:

  1. Accelerate Deductions – Both bills feature a full repeal of the state and local income tax deduction along with other potential cuts or limitations on the deductibility of medical expenses, real estate taxes and mortgage interest.  Both bills offset the limitation on deductions with a higher standard deduction, which means fewer people will benefit from some of these expenses in the form of an itemized deduction on future tax returns. If you are able to pay any of these bills before year end, such as your real estate tax bill or your 4th quarter state tax estimates, you should consider doing that.
  2. Defer Income –  The proposed tax rate structures are different (see this comparison) and your income level will determine what impact the new rates will have on you. However, many people will see lower ordinary income tax rates beginning in 2018 so if you are able to defer any income you otherwise would receive in December to January, this could benefit you from a tax standpoint. We should note that some individuals in high tax states might benefit from accelerating income into this year because of the loss of the state tax deduction so everyone’s situation will be different.
  3. FIFO Cost Basis Planning – This one is a tricky and undercovered aspect of the tax reform bills that would have an impact on tax planning for many individuals, but particularly those who hold concentrated stock positions. Lyle has more detail on this aspect of the bill and some planning strategies to consider before year-end.
  4. Contribute to a Donor Advised Fund – If you are charitably inclined, and facing the potential that you won’t benefit from future charitable contributions on your tax return, you might consider opening a Donor Advised Fund and contributing appreciated securities before year end. This allows you to maximize your tax deduction this year, then spread out the actual donations to the charities you choose in future years. More information on this can be found here, or we’d be happy to help you think through this.
  5. Evaluate Your Business Entity Structure – Both bills include a reduced tax rate for many pass-through businesses, but there are significant differences between the two bills.  Personal services companies are generally not eligible for the preferential rates and each bill has some provisions in place to prevent the shifting of wage income to pass-through income. Changing your business structure will only make sense in certain situations and it would not need to be done before year end, but if you are a business owner it should be something you watch closely as the bills move forward.

A strong year in the stock market usually means larger than normal capital gain distributions from mutual funds and this year is no different. Many mutual fund companies have already announced their estimates for capital gain distributions from their funds this year, so if you own funds in a taxable account you should be checking on those distributions. This website is a great resource for finding those estimates from various fund families. If you are wondering what these distributions mean for you, we covered that a couple years ago here.

A few months ago we learned about the largest annual cost of living increase to social security benefits in several years. We also warned that much of that increase could be offset by an increase in Medicare premiums. The cost of Medicare premiums was recently announced and as expected, many people will see a very minimal increase in their social security benefits as a result of the Medicare increase. Read more about this here.

As we begin to ramp up for our busiest time of the year, we are hiring for several positions. If you know anyone with experience in tax preparation, we’d love to speak to them. We’ve posted our current job openings at www.lkbenson.com/jobs and would appreciate you spreading the word!


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