An Overview of the 2017 Tax Legislation Impact to Individuals
By Saghir Aslalm
Rawalpindi, Pakistan
(The following information is provided solely to educate the Muslim community about investing and financial planning. It is hoped that the Ummah will benefit from this effort through greater financial empowerment, enabling the community to live in security and dignity and fulfill their religious and moral obligations towards charitable activities)
Are there items I should be accelerating? Income
Because of the elimination of certain deductions (e.g., SALT), some taxpayers will actually be taxed at a higher effective rate in 2018. These taxpayers should consult with their tax advisors about ways to accelerate the recognition of income into 2017. In addition, a taxpayer subject to AMT in 2017 (at a 28% tax rate) that does not expect to be subject to AMT in 2018 may be incentivized to accelerate some amount of ordinary income/short-term capital gains in 2017.
This could potentially be achieved by:
1. Triggering gains on investment property
2. 2017 Roth conversions of traditional IRA and 401(k) accounts
– Converting a 401(k) or IRA into a Roth IRA will trigger current taxation (and accelerate state tax liability, which is generally deductible in 2017), but may be less advisable to the extent the taxpayer is currently subject to state income tax but expects to be subject to a lower effective tax rate in the future (e.g., as the result of a change in residency or a lower income in retirement)
3. Withdrawing more than just the required minimum distribution from IRA accounts
Like-kind exchanges
Because like-kind exchanges for non-real property will no longer be available beginning in 2018, taxpayers should consider initiating a like-kind exchange of personal property (e.g., artwork) by disposing of the property or acquiring the replacement property during 2017.
Deductions
Unfortunately, beginning in 2018, several popular itemized deductions will be unavailable or severely limited compared to 2017. Certain taxpayers who previously itemized deductions may find that the nearly doubled standard deduction is more favorable in 2018.
That being said, in 2017, in light of some of these deductions being repealed or otherwise unavailable, filers should see if they can accelerate any of these payments during 2017. Taxpayers should consider:
1. Giving priority to accelerating miscellaneous itemized deductions (to the extent they exceed the 2% floor) that will not be deductible beginning in 2018, e.g., investment expenses
– However, one should consider whether such deductions will actually reduce tax liability to the extent a taxpayer will be subject to the AMT in 2017
2. Paying 2017 state estimated income tax payments prior to January 1, 2018 (Note: Prepayment of 2018 state and local income taxes will not generate a federal tax deduction)
3. Accelerating charitable contributions (see discussion below)
Charitable Contributions
Filers who plan on utilizing the nearly doubled standard deduction in 2018 will not receive a tax benefit for charitable contributions that year. Those taxpayers may consider accelerating charitable contributions to 2017 to realize the tax benefit now. Such charitable contributions may be paid directly to a charity or to a donor advised fund.
However, taxpayers should consider whether any incremental increase of 2017 charitable contributions may be somewhat limited by the “PEASE limitation”, which kicks in when AGI exceeds $300,000 (married) or $250,000 (single). Taxpayers should work with their tax professionals to see if the accelerated 2017 donations would be subject to the itemized deduction phase out. (Note: the “PEASE limitation” has been repealed for 2018.)
529 Contributions
While no federal income tax deduction will be allowed for these contributions, taxpayers should still consider increasing contributions to a Section 529 Plan given its expanded scope.
Section 529 plans are now much more versatile considering distributions may be used for many situations outside of higher education. These contributions are often deductible for state tax purposes (subject to annual limits), which makes them even more valuable beginning in 2018 when the deduction for state taxes are limited.
(Saghir A. Aslam only explains strategies and formulas that he has been using. He is merely providing information, and NO ADVICE is given. Mr Aslam does not endorse or recommend any broker, brokerage firm, or any investment at all, nor does he suggest that anyone will earn a profit when or if they purchase stocks, bonds or any other investments. All stocks or investment vehicles mentioned are for illustrative purposes only. Mr Aslam is not an attorney, accountant, real estate broker, stockbroker, investment advisor, or certified financial planner. Mr Aslam does not have anything for sale.)
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