The Changing Tax Rules and What You Can Do Now

With the tax bill on the “more-certain side” of the horizon, we thought we would give you a brief (and, keep in mind, incomplete) summary of what is proposed. Although it is uncertain what will become law and what will not, you can take action this year to ease the tax bite that may come out of your income next year.

It is amazing to us that so much is still on the negotiating table and how little time our legislators have given us to plan—but here are some key takeaways from the personal-tax (not business) side of the proposed legislation:

  • Most American taxpayers will never itemize on Schedule A again: Why? Because the standard deduction for married couples will be $24,000, and we’re probably losing the California state income tax deduction on our federal taxes, which usually is a large help in getting to the point at which we itemize tax-deductible expenses. 
    • What to do: Stuff as many of your itemized deductions into 2017 as possible. This could mean paying an extra property tax bill this year; pre-paying any state estimated taxes due next year before December 31, 2017; making that extra charitable donation, etc. Get it all into 2017 to be safe!
  • Loss of tax lot harvesting on specific tax lots for stocks and mutual funds: All capital gains now need to be sold on a “first in, first out” (FIFO) basis. So if you have low-cost-basis stock that has gained a lot in price over the years, you cannot select the highest-cost-basis group of stocks and sell those over another group with a lower basis.
    • What to do: If you have high income, consider using low-basis stock to gift to a donor-advised fund or charity, or harvesting gains against losses in 2017.
  • Mortgage interest deduction: Existing mortgages may be grandfathered, but new mortgages are limited to interest deductions for balances below $500,000.
    • What to do: If you are refinancing or purchasing and will have a $500,000-plus mortgage, try to fund the mortgage before year’s end!
  • Personal residence capital gain exclusion of $500,000 for couples and $250,000 for singles: This will stay almost the same; however, you will need to live in the home five out of the last eight years to claim the capital gain exclusion amount. Currently, you have to live in the home for two out of the last five years.
    • What to do: At this point, our legislators have really left us no options.
  • Alimony payments: These may no longer be deductible income for the payor, nor are they taxable income for the recipient. 
    • What to do: If you are divorcing, this change is important to know as it will affect how much you pay or receive in alimony.
  • Elimination of personal exemptions: Today you're allowed to claim a $4,050 personal exemption for yourself, your spouse, and each of your dependents. Both the Senate and House bills eliminate that option. So, for families with three or more kids, the change could reduce or negate any tax relief you might enjoy as a result of other provisions in the bill.
    • What to do: If you are thinking of having a third child, think again. I can say this being a father of three children myself. Thanks, Republican House and Senate!
  •  Increase of the child tax credit: The good news to the bad news above is that the Senate bill increases the child tax credit to $2,000 per child, up from $1,000 currently (and above the $1,600 for the House bill). The Senate would make the credit available for children under age 18, up from today's under-17 age limit. As stated, this may largely be negated by the legislation proposed above.
    • What to do: Not much to do here either.
  • Loss of recharacterizations for Roth conversions after 2017: Please note that this does not include Roth conversions (without recharacterizing assets back into the traditional IRA), which we do for many clients. The Roth IRA recharacterization provision allowed us to transfer assets into a Roth, then recharacterize (or reverse) this based on the performance of the asset transferred.
    • What to do: If this applies to you, recharacterize in 2017.

Thanks again, and let us know at any time if you have questions!