YEAR END PLANNING STRATEGIES IN LIGHT OF NEW TAX LAW

Written By John Friend, CPA of John Friends And Associates

Congress is enacting the biggest tax reform law in thirty years, one that will make fundamental changes in the way you, your family and your business calculate your federal income tax bill, and the amount of federal tax you will pay. Since most of the changes will go into effect next year, there is still a narrow window of time before year-end to soften or avoid the impact of changes and to best position yourself for the tax breaks that may be heading your way. Here is a quick rundown of last-minute moves you might think about making.

Lower Tax Rates Coming

If you are about to convert a regular IRA to a Roth IRA, postpone your move until next year. That way you will defer income from the conversion until next year and possibly have it taxed a lower rates.
The reduction or cancellation of debt generally results in taxable income to the debtor. So if you are planning to make a deal with creditors involving debt reduction, consider postponing action until January to defer any debt cancellation income into 2018.

Disappearing Or Reduced Reductions, Larger Standard Deduction

Individuals will only be able to claim an itemized deduction of up to $10,000 (for a joint return) for the total of (1) state and local property taxes; and (2) state and local income taxes. To avoid this limitation, pay the last installment of estimated state and local taxes for 2017 no later than Dec. 31, 2017, rather than on the January, 2018, due date. But don’t prepay in 2017 a state income tax bill that will be imposed next year – Congress says such a prepayment won’t be deductible in 2017. However, Congress only forbade prepayments for state income taxes, not property taxes, so a prepayment on or before Dec. 31, 2017, of a 2018 property tax installment is apparently okay.

The itemized deduction for charitable contributions won’t be removed. But because most other itemized deductions will be eliminated in exchange for a larger standard deduction ($24,000 for joint filers), charitable contributions after 2017 may not yield a tax benefit for many because they won’t be able to itemize deductions. If you think you will fall in this category, consider accelerating some charitable giving into 2017.

The new law temporarily boosts itemized deductions for medical expenses. For 2017 and 2018 these expenses can be claimed as itemized deductions to the extent they exceed a floor equal to 7.5% of your adjusted gross income. Before the new law, the floor was 10% of adjusted gross income, except for 2017 it was 7.5% of adjusted gross income for age 65-or-older taxpayers. But keep in mind that next year many individuals will have to claim the standard deduction because, for post-2017 years, many itemized deductions will be eliminated and the standard deduction will be increased. If you won’t be able to itemize deductions after this year, but will be able to do so this year, consider accelerating “discretionary” medical expenses into this year. For example, before the end of the year, get new glasses or contacts, or see if you can squeeze in needed dental work.

Other Year End Strategies

The new law substantially increases the alternative minimum tax (AMT) exemption amount, beginning next year. There may be steps you can take now to take advantage of that increase. For example, the exercise of an incentive stock option (ISO) can result in AMT complications. So, if you hold any ISOs, it may be wise to postpone exercising them until next year. And, for various deductions such as depreciation and the investment interest expense deduction, the deduction will be curtailed if you are subject to the AMT. If the higher 2018 AMT exemption means you won’t be subject to the 2018 AMT, it may be worthwhile, via tax elections or postponed transactions, to push such deductions into 2018.

Like-kind exchanges are a popular way to avoid current tax on the appreciation of an asset, but after Dec. 31, 2017, such swaps will be possible only if they involve real estate that isn’t held primarily for sale. So if you are considering a like-kind swap of other types of property, do so before year end. The new law says the old, far more liberal like-kind exchange rules will continue to apply to exchanges of personal property if you either dispose of the relinquished property or acquire the replacement property on or before Dec. 31, 2017.

For decades, businesses have been able to deduct 50% of the cost of entertainment directly related to or associated with the active conduct of a business. For example, if you take a client to a nightclub after a business meeting, you can deduct 50% of the cost if strict substantiation requirements are met. But under the new law, for amounts paid or incurred after Dec. 31, 2017, there is no deduction for such expenses. So if you’ve been thinking of entertaining clients and business associates, do so before year end.

The new law suspends the deduction for moving expenses after 2017 (except for certain members of the Armed Forces), and also suspends the tax-free reimbursement of employment-related moving expenses. So if you’re in the midst of a job-related move, try to incur your deductible moving expenses before year-end, or if the move is connected with a new job and you’re getting reimbursed by your new employer, press for a reimbursement to be made to you before year-end.

Under current law, various employee business expenses, such as home office expenses, are deductible as itemized deductions if those expenses plus certain other expenses exceed 2% of adjusted gross income. The new law suspends the deduction for employee business expenses paid after 2017. So, we should determine whether paying additional employee business expenses in 2017, that you would other wise pay in 2018, would provide you with an additional 2017 tax benefit. Also, now would be a good time to talk to your employer about changing your compensation arrangement – for example, your employer reimbursing you for the type of employee business expenses that you have been paying yourself up to now, and lowering your salary by an amount that approximates those expenses. In most cases, such reimbursement would not be subject to tax.

FCA Allegedly Installed And Failed To Disclose Software That Increases Air Pollution From Vehicles

WASHINGTON – The U.S. Environmental Protection Agency (EPA) today issued a notice of violation to Fiat Chrysler Automobiles N.V. and FCA US LLC (collectively FCA) for alleged violations of the Clean Air Act for installing and failing to disclose engine management software in light-duty model year 2014, 2015 and 2016 Jeep Grand Cherokees and Dodge Ram 1500 trucks with 3.0 liter diesel engines sold in the United States. The undisclosed software results in increased emissions of nitrogen oxides (NOx) from the vehicles. The allegations cover roughly 104,000 vehicles. EPA is working in coordination with the California Air Resources Board (CARB), which has also issued a notice of violation to FCA. EPA and CARB have both initiated investigations based on FCA’s alleged actions.

“Failing to disclose software that affects emissions in a vehicle’s engine is a serious violation of the law, which can result in harmful pollution in the air we breathe,” said Cynthia Giles, Assistant Administrator for EPA’s Office of Enforcement and Compliance Assurance. “We continue to investigate the nature and impact of these devices. All automakers must play by the same rules, and we will continue to hold companies accountable that gain an unfair and illegal competitive advantage.”

“Once again, a major automaker made the business decision to skirt the rules and got caught,” said CARB Chair Mary D. Nichols. “CARB and U.S. EPA made a commitment to enhanced testing as the Volkswagen case developed, and this is a result of that collaboration.”

The Clean Air Act requires vehicle manufacturers to demonstrate to EPA through a certification process that their products meet applicable federal emission standards to control air pollution. As part of the certification process, automakers are required to disclose and explain any software, known as auxiliary emission control devices, that can alter how a vehicle emits air pollution. FCA did not disclose the existence of certain auxiliary emission control devices to EPA in its applications for certificates of conformity for model year 2014, 2015 and 2016 Jeep Grand Cherokees and Dodge Ram 1500 trucks, despite being aware that such a disclosure was mandatory. By failing to disclose this software and then selling vehicles that contained it, FCA violated important provisions of the Clean Air Act.

FCA may be liable for civil penalties and injunctive relief for the violations alleged in the NOV. EPA is also investigating whether the auxiliary emission control devices constitute “defeat devices,” which are illegal.

In September 2015, EPA instituted an expanded testing program to screen for defeat devices on light duty vehicles. This testing revealed that the FCA vehicle models in question produce increased NOx emissions under conditions that would be encountered in normal operation and use. As part of the investigation, EPA has found at least eight undisclosed pieces of software that can alter how a vehicle emits air pollution.

FCA US LLC is a wholly owned subsidiary of Fiat Chrysler Automobiles N.V., a multinational corporation.