Tax Tips for Year-End Planning
An overview of TCJA is a helpful place to start. This explanation will cover the main provisions affecting individual taxpayers.
- Rates – The current seven rates are slightly reduced for most taxpayers. The seven TCJA rates range from 10% to 37%. The 37% bracket applies to taxpayers with income over $600,000 if married and $500,000 if single.
- Capital Gains – The capital gains rules have largely been retained. The rate is 0% for low income taxpayers, 15% for those in the 22% or higher income tax bracket and 20% for married couples with income over $480,050 and single individuals with income over $426,700. There also is a 3.8% Medicare tax on capital gains for upper-income taxpayers.
- Standard Deductions – TCJA nearly doubles the standard deduction for 2018. The standard deduction will be $24,000 for married couples and $12,000 for single indidviduals. The personal exemptions are repealed.
- Mortgage Interest – Homeowners may deduct interest for new loans up to $750,000 on first and second homes. Existing mortgages up to $1 million will be grandfathered.
- State and Local Taxes – Taxpayers may deduct up to $10,000 per year in combined property, state income and local income taxes. There is an option to substitute state sales tax for state income tax.
- Medical Expenses – The deduction is expanded by reducing the floor to 7.5% of adjusted gross income for 2018 and 2019. The medical expense floor will be 10% starting in 2020.
- Alternative Minimum Tax (AMT) – The 2018 AMT exemptions are increased to $109,400 for married couples and $70,300 for single taxpayers.
- Child Tax Credits (CTC) – The CTC is increased to $2,000 per child under age 17. There is a $1,400 portion of the credit that is refundable.
With these significant changes coming in 2018, what planning steps may make sense for 2017? If you are itemizing deductions this year and are likely to take the new higher standard deduction in 2018, then it is helpful to increase your 2017 itemized deductions.
You may increase your 2017 itemized deductions by paying your January mortgage payment in December and by making larger charitable gifts. Many taxpayers will increase their year-end charitable gifts in 2017 and then take the larger standard deduction in 2018.
Editor’s Note: A good plan for “standard deduction” taxpayers who are over 70½ in 2018 will be to make charitable gifts through an IRA Charitable Rollover. Because IRA Rollover gifts to charity fulfill your required minimum distribution, you may have lower taxable income. Even with your lower taxable income in 2018, you can still enjoy the benefit of a $24,000 (married) or $12,000 (single) standard deduction.
Washington Opinions on Tax Cuts and Jobs Act
Members of both parties offered opinions in Washington this week on the Tax Cuts and Jobs Act. This bill is the first comprehensive tax reform act in three decades. Understandably, there are different opinions on whether the potential economic growth will actually occur.
The White House supported the bill, claiming that it would provide both simplification and future growth. It noted, “H.R.1 would simplify tax filing for the large majority of Americans and make the tax code fairer by eliminating dozens of special interest tax benefits. It would also deliver meaningful tax cuts for middle-income families by significantly increasing the standard deduction, lowering tax rates, increasing the Child Tax Credit and extending the Child Tax Credit to more families.”
With respect to the potential for future growth, the White House continued, “The White House Council of Economic Advisors (CEA) estimates that the corporate provisions in the Conference Report on H.R. 1 would add between 3% and 5% to the real Gross Domestic Product of the United States, resulting in higher wages for American workers.”
Majority Leader Mitch McConnell (R-KY) highlighted some Senate provisions incorporated in the final bill. He stated, “The Tax Cuts and Jobs Act achieves all this while preserving the charitable deduction and the adoption tax credit. It protects the exemption for university tuition benefits. A mortgage interest deduction remains, as does a deduction for state and local taxes. The result is a comprehensive tax reform bill that does what we set out to do; take money out of Washington’s pocket and put it back into the pockets of the middle-class Americans who earned it.”
Minority Leader Nancy Pelosi (D-CA) opposed the bill. She stated, “Is there justice in a bill that hands a breathtaking 83% of its benefits to the wealthiest 1% of Americans? No. Eighty-three percent of its benefits to the top 1%. Is there justice in a bill that explodes the national debt to give to the wealthy and well-connected a break, and sticks the debt with our children?”
Rep. Richard Neal (D-MA) is the Ranking Member of the House Ways and Means Committee. He commented that the “legislation will raise taxes on 86 million middle class families, add $2.3 trillion to the federal debt, worsen economic inequality and take health insurance away from 13 million Americans while raising premiums by 10% for everybody else. Our children and grandchildren will be forced to foot the bill for tax cuts given to those at the very top and big corporations.”
Editor’s Note: It is understandable there is major debate over comprehensive tax reform. The Congressional Joint Committee on Taxation estimates that over 60% of taxpayers will save $100 or more under TCJA. With the Child Tax Credit increase, families of four or more may have larger savings. Some high-income taxpayers from states with income taxes will use their $10,000 state and local deduction to cover their property tax. They will lose the deduction on their state income taxes and may face higher tax payments.
Vendor Fees are UBTI
In New Jersey Council of Teaching Hospitals v. Commissioner; No. 2822-16; 149 T.C. No. 22 (19 Dec 2017), the Tax Court held that third-party payments for debt collection and group purchasing programs were unrelated business taxable income (UBTI).
The New Jersey Council of Teaching Hospitals (NJCTH) contracted with OSI Collection Services Inc. (OSI) and Greater New York Hospital Association (GNYHA) for debt collection and group purchasing programs. On IRS Form 990, NJCTH claimed the payments were “substantially related” to their exempt purpose and therefore were not UBTI. The IRS disagreed and issued a $731,326 deficiency.
At trial, NJCTH claimed the payments were royalties under Sec. 512(b)(2) and for the convenience of members under Sec. 513(a)(2).
The Tax Court stated royalties are “payments for the right to use intangible property.” The OSI and GNYHA agreements were explicit service contracts and not royalties.
The “convenience” exemption applies to university dorms, book stores and medical center pharmacies. It does not apply to “saving money” through purchasing programs to benefit members.
Therefore, because the payments were neither royalties nor for the convenience of members, the amounts received were UBTI.
Applicable Federal Rate of 2.6% for January — Rev. Rul. 2018-1; 2018-2 IRB 1 (17 Dec 2017)
The IRS has announced the Applicable Federal Rate (AFR) for January of 2018. The AFR under Section 7520 for the month of January will be 2.6%. The rates for December of 2.6% or November of 2.4% also may be used. The highest AFR is beneficial for charitable deductions of remainder interests. The lowest AFR is best for lead trusts and life estate reserved agreements. With a gift annuity, if the annuitant desires greater tax-free payments the lowest AFR is preferable. During 2017, pooled income funds in existence less than three tax years must use a 1.2% deemed rate of return. Federal rates are available by clicking here.