Tax Reform – What Can You Change? What Must You Accept?
“God, grant me the serenity to accept the things I cannot change,
Courage to change the things I can,
And wisdom to know the difference.”
– Reinhold Niebuhr
The above passage, which many will recognize as the abbreviated Serenity Prayer, was first penned by the theologian Reinhold Niebuhr for his Massachusetts congregation as early as 1934.* Coincidentally 1934 was also the year that President Franklin D. Roosevelt signed into law the Revenue Act of 1934, which raised marginal tax rates for individual Americans.**
Earlier today President Trump signed the Tax Cuts and Jobs Act of 2017 (Tax Reform). We think the best approach is to view today's tax reform in the spirit of Niebuhr’s prayer: Recognizing that most of the reform falls into the category of things we cannot change, we must therefore try to focus on the small parts that we can.
While the Tax Reform will provide tax cuts for many Americans, it may create complications - or even higher taxes - for some. This creates anxiety as people rush to figure how they will be affected individually. What actions should you take? What change is within your power to improve your own situation? With that in mind, we’ve created the following list of changes to contemplate:
Top Tax Planning Changes to Consider:
Consider deferring income into 2018: Starting next year, marginal tax brackets should provide some reduction in marginal tax bracket for most tax payers. Thus, to the extent it’s possible, shifting income from 2017 to 2018 may be advantageous.
Reconsider buying that “big” house: The 2017 Tax Reform caps the deductibility of mortgage interest to the first $750,000 of debt principal. The decision of buying a home naturally extends beyond tax considerations. However, if you’re contemplating taking on a new or bigger mortgage, realize that the math has changed.
Consider bundling deductions into a single year: Because Tax Reform will increase the Standard Deduction to $12,000 for individuals and $24,000 for married couples, the hurdle for claiming itemized deductions will be higher. As a result, it may be advantageous to “bundle” deductions into a single year.
Consider paying 4th quarter 2017 estimated property taxes before year end: Tax Reform will limit the deductibility of state and local property and income taxes up to a cap of $10,000 for joint filers. While prepayment of 2018 liabilities is not allowed, you can pay 4th quarter 2017 estimated taxes by the end of 2017 to use as a deduction in 2017.
Consider potential medical expense deductions before 2019: Tax Reform temporarily reduces the threshold for medical expense deductions from 10% of Adjusted Gross Income (AGI) to 7.5% but only for 2017 and 2018. This reduction also applies to the medical expense deduction for Alternative Minimum Tax purposes. For those who have or are considering eligible expenses, it may be advantageous to use them during this period.
It’s important to note that your individual tax situation is unique. The above strategies may not be appropriate for you. Consult with your tax professional before year-end to discuss these strategies and determine if any are in your best interest.
Please reach out if we can be helpful to you or someone you know as you navigate the tax and investment landscape in 2018. Yours in the Field,
Peter Cook, CFP®, CFA
*https://en.wikipedia.org/wiki/Serenity_Prayer
**https://en.wikipedia.org/wiki/1934
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