The tax bill (TCJA) repeals the deduction for personal exemptions. It increases the standard deductions for single filers to $12,000 and for married joint filers to $24,000. These changes sunset after 2025 (i.e., personal exemptions would be restored). The deductions for state and local income, sales and property taxes (SALT) are capped at $10,000 in total. The deduction for mortgage interest is limited to be allowable only on up to $750,000 of acquisition indebtedness. Mortgages incurred on or before December 15, 2017 are grandfathered under the $1 million limit of acquisition indebtedness. The home equity interest deduction is repealed. There is also a temporary change to the medical expense deduction, allowing clients to deduct medical expenses that exceed 7.5% of adjusted gross income (instead of 10%) in 2017 and 2018. TCJA increases the charitable contribution limit to 60% of adjusted gross income for cash contributions (also sunsets after 2025). NOTE: Contributions of appreciated property are still subject to a 30% of adjusted gross income limitation. The five-year carryover for unused charitable deductions remains. Given these changes, what should I do now?
What You Should Do Now
You will need to factor in the impact of the loss of personal exemptions on your taxable income, as well as the loss of certain itemized deductions. If you previously itemized deductions you may have to to take the standard deduction.
If you lose the ability to deduct sizeable state and local income taxes, you should work with a CPA and your financial advisors to determine if accelerating the payment of 2017 state and local tax liabilities into 2017 makes sense instead of paying them in 2018 (note that these payments are not deductible for AMT purposes). However, the prepayment of 2018 state and local taxes by 12/31/2017 will not be deductible in 2017.
If you are no longer allowed to deduct state income taxes, you may want to investigate the use of incomplete non-grantor trusts (e.g., DINGs and NINGs) as a means of avoiding state income taxes on certain income. In certain cases, you may be able to decant a grantor trust into a non-grantor trust to get this benefit.
You may wish to accelerate medical expenses into 2017 and 2018 while the lower 7.5% of AGI limitation applies in 2018. Note that medical expenses are not deductible after 2018.
If you no longer itemize, you may wish to consider the use of a donor advised fund for a chartiable contribution before the end of 2017.
The AMT was not repealed but the AMT exemption was increased to $70,300 and $109,400 for single filers and married joint filers, respectively. The thresholds for the phase-out of the AMT exemption were also increased to $500,000 for single filers and $1 million for married joint filers. Like many others, this provision sunsets after 2025. If you have Incentive Stock Options (ISOs), you may want to exercise them in years where they are not subject to AMT due to the higher exemptions. When an ISO is exercised, the difference between the stock’s fair market value and the option price is included in AMT for the year in which the exercise occurs. So, you should
review your ISOs and time their sales accordingly.