BREAKING: What you need to do now in response to the Tax Cuts and Jobs Act
Professionals like BCR® all over the country are evaluating the GOP tax bill, also known as the Tax Cuts and Jobs Act, to discern what it means for their clients and how to put them in a favorable position by December 31, 2017. There is already a myriad of articles across the internet regarding the Tax Cuts and Jobs Act, most of which are complicated and difficult for the non-professional to understand. This blog post is intended to serve as a basic reference for what you need to consider in the next week and a half to plan your taxes for 2017 and 2018.
The fundamental difference between 2017 and 2018 taxes and future years, is that you are likely to be in a lower tax bracket with income taxed at a lower rate after 2017. This means paying taxes on a dollar’s worth of income next year is better than paying taxes on a dollar’s worth of income this year. However, you will also lose several opportunities to take deductions and other ways your taxes have been reduced in the past. It could be beneficial to pay any deductions for 2018 or expenses that reduce your income now. For example:
- If you are a small business owner, try to pre-purchase to expense items now that you will eventually need next year. Expenses to pay now could include any office supplies, new technology, marketing materials or advertising collateral.
- If you have income that you can postpone until 2018 it may be beneficial to wait and receive it after the New Year.
- Since state, local and property taxes will only be deductible up to $10,000 in 2018, it is best to find ways to maximize your tax payments in 2017. For those who are doing state estimates, that would simply mean paying your fourth-quarter estimate for any state taxes by year-end. (NOTE: The bill includes provisions that prevent you from deducting 2018 state, local or property taxes that you prepay now, making it not worth the effort).
- If you live in Alabama, you have an additional opportunity to contribute to a qualified scholarship-granting organization (SGO) if you will have more than $10,000 in state, local and property taxes in 2018. Gifting to a SGO can provide you with tax credits that can pay up to half of your state of Alabama income taxes.
On the federal side, it is a charitable contribution. If you contribute enough now to cover half of your 2017 and 2018 state income taxes for Alabama, the credit will roll forward (up to 3 years) so that you are prepaying your 2018 state income taxes, but you are getting a charitable contribution now at the higher income rate.
If you want to take advantage of a SGO contribution, you must act NOW! SGO contributions require you to reserve the SGO with the state, mail the documents with your contribution AND the check must be cashed by 12/31/17.
I’m sure there are many more ideas that you can find throughout the internet, but this should give you a basic framework for what to consider. If you think there is more that you may be able to do to prepare your 2017 and 2018 taxes before the end of this year, or if you have any questions about your personal situation, feel free to reach out to BCR or your tax accountant.