I’m sure many are as anxious as I have been to finally know what the final tax rules will be in 2018. As with all legislation, we don’t know what’s in the final bill until the final bill, but we do finally have summaries… I just this morning downloaded a 133 page “summary” of the new bill to add to my year-end to do’s!
My “summary of the summary and other summaries I’ve been reading” version is that despite the removal of many deductions, this is not the tax simplification we initially thought. In fact, this bill may accelerate the ‘gig economy’ and working for multiple employers, adding to complexity, but perhaps adding to income security through diversifying income payers, if not employment security.
It will be best for most who expect similar income in 2018 to defer income (if possible) and advance deductions to 2017 if you can (but, probably only deductions related to 2017 – you can’t prepay many 2018 and future expenses aside from perhaps employment related and charity).
Specifically, if you can pay before 12/31:
Your winter 2017 property taxes,
Any employment-related expenses, training, etc., if you generally itemize these expenses,
Charitable contributions if you will be close to not itemizing in 2018 ($12,000 for single, $24,000 for married filing joint, $18,000 for head of household)... since many other deductions are eliminated or reduced, this will require some consideration.
On the last point, it may make sense to consider accelerating charitable deductions if you expect to be in a lower bracket in the future. Rather than contributing $5,000 / year for the next several years, a strategy may be to move some of those years forward, and with the stock market at highs it would be beneficial to gift stock if you have a taxable account.
If you expect less taxable income in 2018 I expect we will want to review generating taxable income in 2018. If there is any that can be deferred to 2018, that may be best, as would ideas like flipping your 401(k) contributions from pre-tax to Roth or considering Roth conversions in your 401(k) or IRA.
Since most plans allow for conversions, there is no immediate need to switch to Roth 401(k) contributions. We can review this with you in the new year as it will require time to digest the law and for the projection programs to work out the kinks.
In any case, I do expect a significant amount of tax planning for 2018 and forward. The major impacts of the tax changes will be on the corporation side, but they may be so beneficial that many current employees will be working for their current businesses in the future as self-employed / corporate owners themselves (the accounting lobby continues to be very influential it seems!) to take advantage of lower tax rates on earnings and other income on the business tax side.
Some are suggesting that small business owners may not want to offer 401(k) and other retirement plans. I don’t see this as the case, as businesses often offer other forms of deferral accounts if these accounts prove not to be worthwhile for the owner to offer their employees. However, if you find yourself in this situation, it may be worthwhile to discuss contracting and starting your own 401(k) plan for yourself.
Unlike some of the pundits, the economist should see these changes as beneficial for all (well, most… certainly for accountants). A corporation paying tax is simply an expense for the corporation, and by cutting that expense we should see lower costs of goods and services, more investment in innovation and jobs, and more competition as firms can afford to produce and compete.
One fear I have with the amount of change in this bill is that the changes will be attacked and could lead to employment changes that have a backlash. Therefore, if parts of the bill are temporary and reverted, that would cause new problems since if we go back to higher rates I don’t expect to have the deductions that have been taken away restored.
We may want to consider taking any advantage during 2018 to generate income and lower taxes with the thought that rates could very easily be increased by future legislation and administrations.
As for 2018 changes to your retirement and HSA plans that may require your adjusting contribution amounts:
Elective deferrals for employees with 401(k), 403(b), and in the TSP increases to $18,500 from $18,000 (plus a $6,000 catch-up for those over 50), IRAs remain at $5,500 (with a $1,000 catch-up), and the overall limit on contributions to employer plans increases by $1,000 to $55,000 (your tax-preference contributions, your employer contributions, and any after-tax contributions your plan may allow).
This last number I frequently mention for those looking to save beyond the elective limits for their 401(k) or 403(b), and IRAs. Many plans will allow after-tax contributions up to the $55,000 amount (this amount is the sum of all employee and employer contributions to the plan). Some plans will even allow employees to withdraw after-tax contributions to Roth IRAs during employment without penalty. If you may be in this situation, feel free to contact me to review your options.
For 2018 the maximum HSA single contribution limits increases by $50 to $3,450 and the family limits increase by $150 to $6,900. This amount is the maximum for employee and employer contributions. There is a $1,000 catch-up for those over 55 which remains the same.