2017 YEAR END TAX PLANNING

GEORGE JOHNSON & COMPANY

2017 Year End Tax Planning Letter


 

Dear Clients and Friends,

snowflakeWelcome to our 2017 Year End Tax Planning Letter! Individual income taxes, whether paid through employer withholding or quarterly estimates, are probably one of your largest annual expenditures. So, just as you would shop around for the best price for food, clothing, or merchandise, you want to consider opportunities to reduce or defer your annual tax obligation. This Tax Letter is intended to assist you in that effort.
Your 2017 year-end tax planning begins with a projection of your estimated income, deductions, and tax liability for 2017 and 2018. You should review actual amounts from 2016 to assist you with these projections. To the extent you can control the timing of income and deductions between 2017 and 2018, you should make decisions that will result in the lowest overall tax for both years. If shifting income and deductions between 2017 and 2018 does not reduce your overall tax liability, you should try to defer as much tax liability as possible from 2017 to 2018.
Tax planning for individuals also requires consideration of the tax consequences to any business conducted directly or indirectly by the individual owners. In light of the legislative changes to the tax code that are pending as of the publication of the letter, there may be updates to the proposed tax reform discussed below.
This Tax Letter discusses planning for federal income taxes. However, state income taxes should also be considered. Your client service professional can be consulted regarding state tax matters.
We have also shared spotlights about what’s going on within the firm.  We hope you enjoy this edition of the GJC Advisor.
Happy Holidays,
GJC
Proposed Tax Reform (as of November 17, 2017)
House Proposed Bill
On November 16, 2017, the House approved their proposed tax bill, entitled “Tax Cuts and Jobs Act”. The bill proposes significant legislative changes to the current tax system which would change the current tax system for both individuals and businesses, beginning on January 1, 2018. Below are some of the major changes that should be considered when planning for 2018.
2017 Versus 2018 Marginal Tax Rates
Whether you should defer or accelerate income and deductions between 2017 and 2018 depends to a great extent on your projected marginal (highest) tax rate for each year. With the proposed compression of the income tax rates starting in 2018, you should analyze of your anticipated marginal tax rates for 2017 and 2018.
The highest marginal tax rate for 2017 is 39.6% but the highest marginal tax rate for 2018 may lower. While the income tax rates in 2018 are proposed to be lower, the elimination of many itemized deductions may result in higher marginal rates in 2018 for some taxpayers. Also, it is still unknown what will happen to the additional 3.8% tax on the net-investment income of high-income taxpayers. The tax rates for 2017 and 2018 (under current legislation, without consideration for proposed tax reform) are included in this Tax Letter (see Tax Rates charts). Projections of your 2017 and 2018 income and deductions are necessary to estimate your marginal tax rate for each year.
Shifting Income and Deductions Into the Most Advantageous  Year
You can shift taxable income between 2017 and 2018 by controlling the receipt of income and the payment of deductions. Generally, income should be received in the year with the lower marginal tax rate, while deductible expenses should be paid in the year with the higher marginal rate. If your top tax rate is the same in 2017 and 2018, deferring income into 2018 and accelerating deductions into 2017 will generally produce a tax deferral of up to one year. On the other hand, if you expect your tax rate to be higher in 2018, you may want to accelerate income into 2017 and defer deductions to 2018. Keep in mind, however, that the aforementioned proposed tax reform anticipates the repeal of most itemized deductions.
Planning Suggestion: The time value of money should be considered when making a decision to defer income or accelerate deductions. Comparative computations should be made to determine and evaluate the net after-tax result of these financial actions.

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Sale of Principal Residence
For sales of a principal residence, up to $500,000 of gain on a joint return ($250,000 on a single or separate return) can be excluded. To be eligible for the exclusion, the residence must have been owned and occupied as your principal residence for at least two of the five years preceding the sale. The exclusion is available each time a principal residence is sold, but only once every two years. Special rules apply in the case of sales of a principal residence after a divorce and sales due to certain unforeseen circumstances. If a taxpayer satisfies only a portion of the two-year ownership and use requirement, the exclusion amount is reduced on a pro rata basis.

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Retirement Plan Distributions

Retirement plans have many requirements regarding distributions, but taxpayers can exercise some authority over plan distributions that might facilitate income tax planning.

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Roth IRAs and Education IRAs
Roth IRAs
Taxpayers with income under certain income limits are permitted to make contributions to a Roth IRA. Unlike regular IRAs, where contributions are deductible and later distributions are taxable, contributions to Roth IRAs are not deductible and later “qualified” distributions are not taxable.

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Moving Expenses
Deductible moving expenses are limited to the cost of moving household goods and personal effects, plus traveling (including lodging but not meals) from your old residence to your new residence. To be deductible, a taxpayer must satisfy a distance test, a length-of-employment test and a commencement-of-work test.
Moving expenses can be deducted “above-the-line” in computing AGI instead of as miscellaneous itemized deductions. Thus, these expenses are not subject to the various limitations applicable to itemized deductions and can be deducted in addition to itemized deductions or the standard deduction. Also, deductible moving expenses reduce AGI for purposes of calculating the various AGI-based limitations.
Both the House and Senate tax reform proposals would repeal this deduction beginning in 2018 except in the case of expenses by members of the Armed Forces. Similarly, employers could no longer provide tax free reimbursements of moving expenses that are no longer deductible by the employee.
Interest Expense
Personal Interest
Interest is not deductible on tax deficiencies, car loans, personal credit card balances, student loans (except for taxpayers eligible for the above-the-line deduction for interest paid on qualified education loans), or other personal debts.

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Miscellaneous Deductions
Unreimbursed employee business expenses, investment expenses, personal tax advice and preparation fees, and most other miscellaneous itemized deductions, are deductible only if they exceed 2% of AGI.
Planning Suggestion: Consider bunching miscellaneous itemized deductions into a year in which the 2% AGI limit will be exceeded. However, not all prepaid expenses, such as multi-year subscriptions to financial periodicals, are currently deductible.

The Senate’s proposed tax reform calls for the blanket repeal of all miscellaneous itemized deductions. The House version has no such blanket repeal but does propose repealing certain specific deductions such as the deduction for tax preparation fees and unreimbursed employee business expenses.

Business Meals and Entertainment
Only 50% of an employee’s unreimbursed cost of business meals and entertainment qualifies as a miscellaneous deduction. Club dues generally are not deductible; however, dues paid to the following types of organizations generally continue to be deductible as business expenses:
  • Professional associations;
  • Civic or public service organizations, such as Kiwanis, Lions, Rotary, or Civitan; and
  • Business leagues, trade associations, chambers of commerce, boards of trade, and real estate boards.
Leased Automobiles
In prior years, the Service permitted salaried employees with unreimbursed business expenses as well as self-employed sole proprietors, partners, and S corporation shareholders to deduct only actual expenses incurred with respect to leased automobiles. Now, the Service allows taxpayers, beginning in the first year a leased automobile is placed in service, to use the standard mileage rate for business activity (53.5 cents per mile for travel during 2017).
Planning Suggestion: Consider claiming the standard mileage rate for leased automobiles. There is less recordkeeping, and the standard mileage rate may result in a larger deduction.
Personal Exemptions
For 2017, a $4,050 deduction is allowed for personal exemption. The personal exemption is subject to an AGI phase-out as follows:
Married filing joint returns and surviving spouses
$313,800 – $436,300 (complete phase-out)
Heads of Households
$287,650 – $410,150 (complete phase-out)
Single Individuals
$261,500- $384,000 (complete phase-out)
Married filing separate
$156,900 – $218,150
(complete phase-out)

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Passive Activities, Rental and Vacation Homes
Losses from passive activities (which, as discussed below, generally include the rental of real estate) are deductible only against passive income. Passive losses cannot be used to reduce non-passive income, such as compensation, dividends, or interest. Similarly, credits from passive activities can be used only to offset the regular tax liability allocable to passive activities. Unused passive losses are carried over to future years and can be used to offset future passive income. Any remaining loss is deductible when the activity, which gave rise to the passive loss, is disposed of in a transaction in which gain or loss is recognized.

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Alternative Minimum Tax (AMT)
A taxpayer must pay either the regular income tax or the AMT, whichever is higher. The AMT tax system is parallel to the regular tax, but it treats some items of income and deduction differently.

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Children’s Taxes
Unearned income of a child under age 18, exceeding $2,100 for 2017 and 2018, is taxed at the parents’ top rate rather than at the child’s rate (“kiddie tax”). Earned (compensation) income received by a child under age 18 is taxed at the child’s rate.
Estimated Taxes
Generally, all individuals must make quarterly estimated tax payments if they have income that is not subject to withholding. This includes individuals who are self-employed or retired or who have investment income, such as interest, dividends, and capital gains. It also includes partners and S corporation shareholders.

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Year-end and Other Gifts; Portability
The end of the year is the traditional time for making gifts. For 2017 you may give up to $14,000 ($15,000 for 2018) to a person without incurring any federal gift tax liability. The $14,000 annual limit applies to each donee. Thus, you may make $14,000 gifts to as many people as you like. If you are married, you and your spouse can give a combined $28,000 to each donee ($30,000 in 2018), if your spouse consents to splitting the gift or if you give community property. To qualify for this annual exclusion, the property must be given outright to the donee or put into a trust that meets certain conditions.

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Conclusion
Like an annual physical examination is important for maintaining good health, an annual financial examination that includes year-end tax planning can enhance your financial well-being. GJC is available to help you achieve your tax and financial objectives.
  • 2017 Federal Income Tax Rates
  • 2018 Federal Income Tax Rates (under current law, without consideration for proposed tax reform)
  • Tax Tips for the Self-Employed
  • Tax Provisions Relating to Higher Education Costs – 2017
Year-End Nonprofit Contributions

SPOTLIGHT

Ian is a Staff Accountant. He joined GJC in 2016.

Eric is a Staff Accountant. He joined GJC in 2016.

Join us in congratulating our team members, Ian Hildebrandt and Eric Bonk for passing the CPA Exam!
The Uniform CPA Examination protects the public interest by helping to ensure that only qualified individuals become licensed as U.S. Certified Public Accountants (CPAs). Ian and Eric both worked hard to prepare for the four-part exam!
Congratulations Ian and Eric!
If everyone is moving forward together, then success will take care of itself. ~ Henry Ford ~

COMMUNITY

A couple of our team members were happy to participate with our client, The Parade Company, for their annual Thanksgiving Day festivities. This year, Gloria Zhao, a Principal, ran in the “Double Drumsticks” 10K +5K Turkey Trot. The race was held early Thanksgiving Day morning. Upon completion of the race, our Senior Accountant, Diamond Reynolds, geared up and marched as an “Emoji Clown” at the America’s Thanksgiving Day Parade, along Detroit’s historic Woodward Avenue. This wonderful holiday tradition dates back to 1924.
Additionally, our Staff Accountant, Ben Wicks participated in CARE of Southeastern Michigan’s Ride 4 Recovery cycling event. The ride took place on September 23, 2017. The event started at Lake St. Clair Metropark and included a “scenic loop” around Detroit, including Belle Isle. He cycled the 62 mile track! The purpose of the event was to raise awareness and funds for CARE’s mission: To strengthen resiliency in people and their communities through prevention, education, and services that improve the quality of life.

 

Gloria run1

Gloria at the starting line, getting ready to run the 15K Turkey Trot in Detroit. This is a piece of pumpkin pie for this intermediate marathon runner!

Diamond with clowns.jpg

Diamond clowning around with new friends!

Diamond - Emoji Clown

“Everyone was so excited about participating in the parade. I was amazed to find out some individuals have been participating for more than 20 years. I made some new friends who showed me the ropes because it was my first year. I will definitely join in the festivities again next year!” ~ Diamond Reynolds ~

Diamond Emoji Clown1

We hope that the contents of this issue of the GJC Advisor will provide you with valuable information. As always, if you have any questions or comments, please do not hesitate to share them with our team members.

This general information should not be acted upon without first determining its application to your specific situation. For further details on any article, please contact us.