Dec 14, 2017

Tax Reform—what will it be?…That is the question

Although both the House of Representatives and Senate have passed separate proposals for tax reform to be known as the Tax Cuts and Jobs Act (Tax Reform Act), there are many details that need to be resolved prior to the proposals becoming law.

The House and Senate bills need to be reconciled before a final vote and, currently, a conference committee has been established for such purpose. While there are many differences between the versions submitted by the House and the Senate, we have learned certain facts, as follows:

  • If it passes, the Tax Reform Act will not be simple and individuals and businesses will not be allowed to file tax returns using a postcard. The explanation of the House bill is approximately 75 pages with small font and the explanation of the Senate bill is about 445 pages.
  • The corporate tax rate will be reduced, possibly to a level of 20 percent, from its current 35 percent. Income from pass-through entities such as limited partnerships, limited liability companies or “S” corps will be subject to lower tax rates.
  • Federal estate taxes will not be eliminated but during the next 10 years fewer estates will be subject to the tax.
  • Federal tax legislation historically has been prospective; therefore, if the Tax Reform Act is passed, including a reduction in tax rates, it will commence in 2018 and thereafter.
  • Under both the Senate and House proposed bills the standard deduction for individuals will increase and many of the itemized deductions such as state and local taxes, mortgage- interest and possibly even medical expenses will be reduced or eliminated.
  • Under current law commencing in 2018, the federal estate lifetime exemption will be increased to $5,600,000 per person with portability between spouses and the annual gift exclusion will increase to $15,000.
  • Although there is uncertainty as to whether the Tax Reform Act will pass, there are items taxpayers should consider regarding year-end planning.

Cash-basis taxpayers, which are some businesses and most individuals, deduct their expenses as paid by check, cash or credit card, even if the credit card is paid off in the next year. Provided alternative minimum tax or AMT is not an issue, these taxpayers should consider paying expenses before year-end and possibly prepaying certain expenses that would otherwise be paid in 2018 such as real estate taxes in jurisdictions where tax can be paid in December. Also, the estimated state and local taxes that would otherwise be paid on Jan. 15, 2018, could be prepaid in the 2017 tax return preparation fees.

Cash-basis taxpayers may also defer income to 2018 as long as it is not actually or constructively received in 2017. Accrual-basis business taxpayers may generally accrue and deduct compensation to unrelated parties so long as it is paid within 2-1/2 months following the end of their tax year.

Investors may wish to sell stock that appreciated before year-end if they plan on rebalancing their portfolio to avoid the Senate proposal of first-in, first-out on blocks of securities where older purchases have lower costs basis.

As we approach the end of 2017, it is important for taxpayers to review their tax situations and consult with professionals to issue the appropriate adjustments. 

The tax & employee benefits attorneys at Chuhak & Tecson, P.C. will be pleased to assist with your individual or corporate tax questions. 

This Chuhak & Tecson, P.C. communication is intended only to provide information regarding developments in the law and information of general interest. It is not intended to constitute advice regarding legal problems and should not be relied upon as such.

Client alert authored by: Edwin I. Josephson, Principal

This alert originally appeared in the Winter 2017 Corporate Focus newsletter.