Year-End Planning Moves to Help Lower Your Tax Bill

Section 1 – Planning Strategies for Tax Reform

Other Year-End Strategies

Below are some other “last minute” moves that could wind up saving tax dollars in the event tax reform is passed:

• The exercise of an inventive stock option (ISO) can result in AMT complications.  But both the Senate and House versions of the tax reform bill call for the AMT to be repealed next year.  So if you hold any ISOs, it may be wise to hold off exercising them until next year.
• If you’ve got your eye on a plug-in electric vehicle, buying one before year-end could yield you an up-to-$7,500 discount in the form of a tax credit. The House-passed bill, but not the one before the Senate, would eliminate this credit after 2017.
• If you’re in the process of selling your principal residence and you wrap up the sale before year end, up to $250,000 of your profit ($500,000 for certain joint filers) will be tax-free if you owned and used the property as your main home for at least two of the five years before the sale.  However, under the House-passed bill and the bill before the Senate, the $250,000/$500,000 tax free amounts would apply to post-2017 sales only if you own and use the property as your main home for five out of the previous eight years.
• Under current rules, alimony payments generally are an above-the line deduction for the payor and included in the income of the payee, generally effective for any divorce decree or separation agreement executed before 2017.  So if you’re in the middle of a divorce or separation agreement, and you’ll wind up on the paying end, it would be worth your while to wrap things up before year end if the House-passed bill carries the day. On the other hand, if you’ll wind up on the receiving end, it would be worth your while to wrap things up next year.
• Both the House-passed bill and the version before the Senate would repeal the deduction for moving expenses after 2017 (except for certain members of the Armed Forces), so if you’re about to embark on a job-related move, try to incur your deductible moving expenses before year-end.

Individual Tax Payers

We have compiled a checklist of actions based on current tax rules that may help you save tax dollars if you act before year-end. Not all actions will apply in your particular situation, but you or a family member will likely benefit from many of them.

• Higher-income earners must be wary of the 3.8% surtax on certain unearned income and the 0.9% Medicare tax.
  • The surtax is 3.8% of the lesser of: (1) net investment income (“NII”), or (2) the excess of modified adjusted gross income (“MAGI”) over a threshold amount ($250,000 for joint filers or surviving spouses, $125,000 for a married individual filing a separate return, and $200,000 in any other case). As the year-end nears, a taxpayer’s approach to minimizing or eliminating the 3.8% surtax will depend on his estimated MAGI and NII for the year. Some taxpayers should consider ways to minimize (e.g., through deferral) additional NII for the balance of the year, while others should try to see if they can reduce MAGI other than NII; some individuals will need to consider ways to minimize both NII and other types of MAGI.]
  • The 0.9% additional Medicare tax also may require higher-income earners to take year-end actions. It applies to individuals for whom the sum of their wages received with respect to employment and their self-employment income is in excess of an unindexed threshold amount ($250,000 for joint filers, $125,000 for married couples filing separately, and $200,000 in any other case). Employers must withhold the additional Medicare tax from wages in excess of $200,000 regardless of filing status or other income. Self-employed persons must take it into account in figuring estimated tax. There could be situations where an employee may need to have more withheld toward the end of the year to cover the tax. For example, if an individual earns $200,000 from one employer during the first half of the year and a like amount from another employer during the balance of the year, he would owe the additional Medicare tax, but there would be no withholding by either employer for the additional Medicare tax since wages from each employer don’t exceed $200,000.
• Realize losses on stock while substantially preserving your investment position. There are several ways this can be done. For example, you can sell the original holding, then buy back the same securities at least 31 days later. It may be advisable for us to meet to discuss year-end trades you should consider making.
• Postpone income until 2018 and accelerate deductions into 2017 to lower your 2017 tax bill. This strategy may be especially valuable if Congress succeeds in lowering tax rates next year in exchange for slimmed-down deductions. Regardless of what happens in Congress, this strategy could enable you to claim larger deductions, credits and other tax breaks for 2017 that are phased out over varying levels of adjusted gross income (AGI). These include child tax credits, higher education tax credits and deductions for student loan interest. Postponing income also is desirable for those taxpayers who anticipate being in a lower tax bracket next year due to changed financial circumstances. Note, however, that in some cases, it may pay to actually accelerate income into 2017. For example, this may be the case where a person will have a more favorable filing status this year than next (e.g., head of household versus individual filing status).
• If you believe a Roth IRA is better than a traditional IRA, consider converting traditional-IRA money invested in beaten-down stocks (or mutual funds) into a Roth IRA if eligible to do so. Keep in mind, however, that such a conversion will increase your AGI for 2017.
• If you converted assets in a traditional IRA to a Roth IRA earlier in the year and the assets in the Roth IRA account declined in value, you could wind up paying a higher tax than is necessary if you leave things as is. You can back out of the transaction by recharacterizing the conversion-that is, by transferring the converted amount (plus earnings, or minus losses) from the Roth IRA back to a traditional IRA via a trustee-to-trustee transfer. You can later reconvert to a Roth IRA.
• It may be advantageous to try to arrange with your employer to defer, until early 2018, a bonus that may be coming your way. This could cut as well as defer your tax if Congress reduces tax rates beginning in 2018.
• Consider using a credit card to pay deductible expenses before the end of the year. Doing so will increase your 2017 deductions even if you don’t pay your credit card bill until after the end of the year.
• If you expect to owe state and local income taxes when you file your return next year, consider asking your employer to increase withholding of state and local taxes (or pay estimated tax payments of state and local taxes) before year-end to pull the deduction of those taxes into 2017 if you won’t be subject to alternative minimum tax (AMT) in 2017. Pulling state and local tax deductions into 2017 would be especially beneficial if Congress eliminates such deductions beginning next year.
• Take an eligible rollover distribution from a qualified retirement plan before the end of 2017 if you are facing a penalty for underpayment of estimated tax and having your employer increase your withholding is unavailable or won’t sufficiently address the problem. Income tax will be withheld from the distribution and will be applied toward the taxes owed for 2017. You can then timely roll over the gross amount of the distribution, i.e., the net amount you received plus the amount of withheld tax, to a traditional IRA. No part of the distribution will be includible in income for 2017, but the withheld tax will be applied pro rata over the full 2017 tax year to reduce previous underpayments of estimated tax.
• Estimate the effect of any year-end planning moves on the AMT for 2017, keeping in mind that many tax breaks allowed for purposes of calculating regular taxes are disallowed for AMT purposes. These include the deduction for state property taxes on your residence, state income taxes, miscellaneous itemized deductions, and personal exemption deductions. If you are subject to the AMT for 2017, or suspect you might be, these types of deductions should not be accelerated.
• You may be able to save taxes by applying a bunching strategy to pull “miscellaneous” itemized deductions, medical expenses and other itemized deductions into this year. This strategy would be especially beneficial if Congress eliminates such deductions beginning in 2018.
• You may want to pay contested taxes to be able to deduct them this year while continuing to contest them next year.
• You may want to settle an insurance or damage claim in order to maximize your casualty loss deduction this year.
• Take required minimum distributions (RMDs) from your IRA or 401(k) plan (or other employer-sponsored retirement plan). RMDs from IRAs must begin by April 1 of the year following the year you reach age 70-½. That start date also applies to company plans, but non-5% company owners who continue working may defer RMDs until April 1 following the year they retire. Failure to take a required withdrawal can result in a penalty of 50% of the amount of the RMD not withdrawn. Although RMDs must begin no later than April 1 following the year in which the IRA owner attains age 70-½, the first distribution calendar year is the year in which the IRA owner attains age 70-½. Thus, if you turn age 70-½ in 2017, you can delay the first required distribution to 2018, but if you do, you will have to take a double distribution in 2018-the amount required for 2017 plus the amount required for 2018. Think twice before delaying 2017 distributions to 2018, as bunching income into 2018 might push you into a higher tax bracket or have a detrimental impact on various income tax deductions that are reduced at higher income levels. However, it could be beneficial to take both distributions in 2018 if you will be in a substantially lower bracket that year.
• Increase the amount you set aside for next year in your employer’s health flexible spending account (FSA) if you set aside too little for this year.
• If you become eligible in December of 2017 to make health savings account (HSA) contributions, you can make a full year’s worth of deductible HSA contributions for 2017.
• Make gifts sheltered by the annual gift tax exclusion before the end of the year and thereby save gift and estate taxes. The exclusion applies to gifts of up to $14,000 made in 2017 to each of an unlimited number of individuals. You can’t carry over unused exclusions from one year to the next. Such transfers may save family income taxes where income-earning property is given to family members in lower income tax brackets who are not subject to the kiddie tax.
• If you were affected by Hurricane Harvey, Irma, or Maria, keep in mind that you may be entitled to special tax relief under recently passed legislation, such as relaxed casualty loss rules and eased access to your retirement funds. In addition, qualifying charitable contributions related to relief efforts in the Hurricane Harvey, Irma, or Maria disaster areas aren’t subject to the usual charitable deduction limitations.

Businesses and Business Owners

• Businesses should consider making expenditures that qualify for the business property expensing option. For tax years beginning in 2017, the expensing limit is $510,000 and the investment ceiling limit is $2,030,000. Expensing is generally available for most depreciable property (other than buildings), off-the-shelf computer software, air conditioning and heating units, and qualified real property-qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property. The generous dollar ceilings that apply this year mean that many small and medium-sized businesses that make timely purchases will be able to currently deduct most if not all their outlays for machinery and equipment. What’s more, the expensing deduction is not prorated for the time that the asset is in service during the year. The fact that the expensing deduction may be claimed in full (if you are otherwise eligible to take it) regardless of how long the property is held during the year can be a potent tool for year-end tax planning. Thus, property acquired and placed in service in the last days of 2017, rather than at the beginning of 2018, can result in a full expensing deduction for 2017.
• Businesses also should consider making buying property that qualifies for the 50% bonus first-year depreciation if bought and placed in service this year (the bonus percentage declines to 40% next year). The bonus depreciation deduction is permitted without any proration based on the length of time that an asset is in service during the tax year. As a result, the 50% first-year bonus write-off is available even if qualifying assets are in service for only a few days in 2017.
• Businesses may be able to take advantage of the “de minimis safe harbor election” (also known as the book-tax conformity election) to expense the costs of lower-cost assets and materials and supplies, assuming the costs don’t have to be capitalized under the Code Sec. 263A uniform capitalization (UNICAP) rules. To qualify for the election, the cost of a unit of property can’t exceed $5,000 if the taxpayer has an applicable financial statement (AFS; e.g., a certified audited financial statement along with an independent CPA’s report). If there’s no AFS, the cost of a unit of property can’t exceed $2,500. Where the UNICAP rules aren’t an issue, consider purchasing such qualifying items before the end of 2017.
• Businesses contemplating large equipment purchases also should keep a close eye on the tax reform plan being considered by Congress. The current version contemplates immediate expensing-with no set dollar limit-of all depreciable asset (other than building) investments made after Sept. 27, 2017, for a period of at least five years. This would be a major incentive for some businesses to make large purchases of equipment in late 2017.
• If your business was affected by Hurricane Harvey, Irma, or Maria, it may be entitled to an employee retention credit for eligible employees.
• A corporation should consider deferring income until 2018 if it will be in a higher bracket this year than next. This could certainly be the case if Congress succeeds in dramatically reducing the corporate tax rate, beginning next year.
• A corporation should consider deferring income until next year if doing so will preserve the corporation’s qualification for the small corporation AMT exemption for 2017. Note that there is never a reason to accelerate income for purposes of the small corporation AMT exemption because if a corporation doesn’t qualify for the exemption for any given tax year, it will not qualify for the exemption for any later tax year.
• A corporation (other than a “large” corporation) that anticipates a small net operating loss (NOL) for 2017 (and substantial net income in 2018) may find it worthwhile to accelerate just enough of its 2018 income (or to defer just enough of its 2017 deductions) to create a small amount of net income for 2017. This will permit the corporation to base its 2018 estimated tax installments on the relatively small amount of income shown on its 2017 return, rather than having to pay estimated taxes based on 100% of its much larger 2018 taxable income.
• If your business qualifies for the domestic production activities deduction (DPAD) for its 2017 tax year, consider whether the 50%-of-W-2 wages limitation on that deduction applies. If it does, consider ways to increase 2017 W-2 income, e.g., by bonuses to owner-shareholders whose compensation is allocable to domestic production gross receipts. Note that the limitation applies to amounts paid with respect to employment in calendar year 2017, even if the business has a fiscal year. Keep in mind that the DPAD wouldn’t be available next year under the tax reform plan currently before Congress.
• To reduce 2017 taxable income, consider deferring a debt-cancellation event until 2018.
• To reduce 2017 taxable income, consider disposing of a passive activity in 2017 if doing so will allow you to deduct suspended passive activity losses.

Section 3 – Other Planning Opportunities to Consider

Cost Segregation Studies

A cost segregation study is a detailed analysis of building acquisition, construction, or renovation costs. The goal is to re-allocate these costs incurred from standard depreciable lives (27.5 or 39 years) to the shortest recovery period in which they can be depreciated (potentially 5, 7, or 15 years). Proper classification can provide benefits such as increased depreciation deductions, a reduction in tax liabilities, and maximization of cash flow from your investments.

Cost seg studies are not exclusive to building costs in the current tax year. A study can be performed on a building that was placed into service during a prior year, allowing the taxpayer to reclaim “missed” depreciation deductions from prior years (without the need to file amended returns).

While the principle of cost segregation is simple to state, the practice of cost segregation can present a formidable challenge. The methodology of a cost seg study involves identification of eligible land improvements and personal property, analysis of cost data, preparation of cost breakdowns, and allocation of costs.

Withum serves a variety of clients in the real estate industry including commercial, residential and industrial property developers, owners/investors, managers, agents and brokers.

Our real estate specialists thoroughly understand the intricacies of your industry, including issues related to government regulations (HUD, low-income housing credits, etc.). At Withum, we’ll provide you with the in-depth knowledge, technical skills and financial advice required by real estate professionals to compete and succeed.

Export Incentives of an IC-DISC

The interest-charge domestic international sales corporation (IC-DISC) is an entity often used by U.S. manufacturers and exporters, and their shareholders, to defer taxation on offshore profits. When these accumulated, untaxed profits become taxable, the IC-DISC can convert them from ordinary business income into tax-advantaged dividend income. This ability to defer taxation on offshore profits and transform the character of these amounts at the time the accumulated earnings become taxable also provides the opportunity to use an IC-DISC in a variety of different ways, including retirement planning, compensation planning, and estate or succession planning.

An IC-DISC allows: (1) benefits for engineering and architectural services related to foreign construction projects; (2) the performance of services in the United States; and (3) using benefits as a way to reward employees by distributing IC-DISC shares.

An IC-DISC must be a U.S. corporation and obtain IRS approval to qualify. The corporation must have its own bank account and one class of stock, and meet an annual qualified export receipts test and qualified export assets test. The qualified export asset test requires that at least 95% of the IC-DISC’s gross receipts and assets must be related to the export of property, the value of which is at least 50% U.S.-produced content.

If you are involved in manufacturing and exportation and can meet the DISC requirements, this may be a very advantageous tax savings opportunity.

Personal Property Tax Reviews

Your business is subject in certain states to personal property tax compliance and reporting. The most often seen error in commercial personal property tax is the failure to report only those items which qualify as taxable personal property. Conducting fixed asset reviews can identify items that are real property dually reported on both real and personal property tax returns. Reviews of leasehold improvements, in particular, tend to yield items that are real property which often are reported additionally on personal property tax returns. If your company transfers equipment between sites located in multiple states, such property may also be reported on multiple property tax returns.

Inventory planning and exemption reviews can further determine in which states your inventory is subject to tax, the potential for alternative valuation dates, as well as potential exemptions such as the Freeport Election in Texas and Georgia. As warehouses need to report individually, moving your warehouse location from a state in which you are paying property taxes on inventory with no Freeport Election to a state with such exemptions, or which does not tax inventory at all, could remove a significant burden on your P&L.

Real Property Valuations

Overpayment of real property taxes can be best addressed through assessment reviews and appeals. These may lower your property’s valuation for tax purposes and aid in minimizing taxable impact on real property you own that is overvalued by your county and/or state. Even on those properties which you rent, if you are the major tenant, you may have the right to appeal their real property tax determinations, which are prorated as a portion of your ultimate rent as passed down by your landlord. Additionally, increasing your current depreciation deductions via cost segregation studies and accounting method changes accelerates the tax benefits of your highly-valued property and assets with potentially overvalued useful lives.

Nexus and Apportionment Studies

Proper and annual evaluation of your company’s state nexus for both income and sales and use tax purposes is vital for establishing whether your company is subject to tax based on its presence in the states in you do business. Through a nexus study, you can evaluate the presence of your employees, property and business relationships to determine where you should register to do business, file income and use tax returns, and collect and remit sales taxes from your customers. Further, with those states that have adopted an “economic nexus” standard such as California, evaluation of the amount of your sales in-state can exceed the sales thresholds establishing nexus and a consequent filing responsibility whether or not you have a physical presence in-state. If your business is engaged in substantial Internet sales or provides services which may constitute “software/infrastructure as a service” (“SaaS / IaaS”) the aspects of click-through nexus and the triggering of nexus by tech-specific activities must be continuously evaluated as the states’ antiquated tax legislation seek to meet the business services and practices of the 21st century.

Moreover, determining the proper assignment of income for your multistate company amongst the states in which you have nexus must be engaged in to properly determine sourcing, estimates and credits for taxes paid applicable to your various state returns. States continually modify and amend both their rules and their formulae regarding how income is classified, segmented and calculated. Through an apportionment study, you can be confident you are applying both the right contemporary state formula (as many states move to a single sales factor from the traditional three-factor property, payroll and sales) as well as proper sourcing of income for your sales, services and intangibles (which is seeing a significant increase in market-based sourcing over costs of performance).

Transfer Pricing

Over the last few years, the chances of a multinational entity being confronted with a transfer pricing audit have grown substantially. Due to the intense focus on transfer pricing by almost all taxing authorities around the globe, combined with the growing focus on an international exchange of information, it appears it is only a matter of time before any multinational entity can be subject to transfer pricing audit scrutiny.

Such audits may provide for substantial risk and disputes, and proper preparation is key in managing the risks and obtaining successful results.

In order to best manage the audit process and potential exposure, it is essential to understand that this involves not only the actual audit proceedings but also the time before and after the actual audit takes place. Some best practices to follow in the preparing and participating in an audit for Transfer Pricing include the following:

• Prepare well in advance;
• Review your documentation and ensure it meets the IRS standards;
• Involve your Transfer Pricing Advisor as early as possible to discuss strategies in preparation for the audit;
• Establish structured communications with the Tax Auditor; and
• Ensure all intercompany agreements are current.

Even if you do not have an audit currently going on, it might be a good idea to have someone come in and review your transfer pricing strategy, and advise you on any possible deficiencies that could arise under an audit should one come about.

Conclusion

These are just some of the year-end steps that can be taken to save taxes. Again, by contacting us, we can tailor a particular plan that will work best for you.

Additional Year-End Tax Planning Resources