Tax Reform What to Do Now?

As I write to you on Friday afternoon, it appears that “tax reform” is a done deal. So what steps should you be considering between now and the end of the year to make the best out of this disappointing situation?

First, some information about how part of the tax law works. I’m referring about the AMT or Alternative Minimum Tax. Are they repealing it? Well yes…..and no. It is going to stay as part of the law, but the exemption will be raised to $500,000 of income, meaning it will only apply to high incomers. What you need to know about the AMT is that the AMT tax rate is lower than regular tax rates. The top AMT rate is 28%, which the top bracket under the regular tax system is 39.6%. Because the AMT does not allow certain deductions, such state and local income taxes and property taxes, the AMT tax can actually be higher than the regular tax even though its tax rate is lower. It is important to grasp an understanding of this AMT concept, before you decide what action to take now while the old law is still in effect through the end of this year.

So, what should you (maybe) do? Here we go.

1. Property taxes. If not in the AMT, prepay property taxes now on any and all properties you own for taxes due in the first half of 2018. You will get a deduction for them in 2017. In 2018, they will be limited to a deduction of $10k. If you are likely to be in the AMT in 2017, do not prepay property taxes as you will not get any deduction under the AMT.

2. State and local estimated income taxes. The same as property taxes. Pay ahead if possible if not in the AMT. Do not pay if in the AMT. Note states like New York will let you prepay your estimated tax payments for the first 3 quarters of 2018 before the end of this year. Again, only do this if you are not in the AMT.

If you decide to do this, make separate payments for the 4th quarter of 2017 and for each of the first three estimates for 2018. That would be four separate payments to be made this year. Payments can be made online through the state tax departments’ website or you can download and print out 2018 vouchers to mail in.

To obtain vouchers or make electronic payments for:

NY https://www.tax.ny.gov/pdf/2018/inc/it2105_2018_fill_in.pdf

CT http://www.ct.gov/drs/lib/drs/forms/1-2018/income/ct-1040es-0118.pdf

NJ https://www1.state.nj.us/TYTR_RevTaxPortal/jsp/IndTaxLoginJsp.jsp

3. Mortgage interest. Deductible whether in AMT or not. You will likely be in a higher bracket in 2017 than in 2018. Paying your January payment in December will give you a deduction a year earlier and at a slight higher tax rate. Not a huge one, but worth considering. If you do this, I suggest you pay soon so that your mortgage company will include the payment in your 1098 form sent to the IRS. If they do not receive your payment until early January, they may not pick it up.

4. Charitable contributions. Not affected by AMT. Again, as you will likely be in a lower tax bracket next year, donations will be worth a bit more if made this year.

5. Capital gains. Likely taxed at the same rate this year and next, dependent on your income in each year.

6. General strategy. With tax rates higher this year and lower next year, earned income will be taxed at a lower rate next year, so defer it if you can. Deductions will be worth more this year, so try to accelerate them if possible. However, if you are likely to be in the AMT this year (2017), opposite strategy makes sense. Remember AMT rates are lower, so accelerate income to 2017 (you’ll pay tax a year earlier, but at a lower rate). Defer mortgage payments and charitable donations until next year when likely worth more.

And remember for what it’s worth, the following states have no state income tax: Alaska, Florida, Nevada, South Dakota, Texas, Washington, Wyoming. I just thought you’d like to know! :-)