Recently, many people asked me about the tax reform. I always replied that let's wait and talk about it when it's finalized. On December 22, 2017, president Trump signed the tax bill into law. Now it's time to take a look at it. Instead of focusing on the differences between current and new tax bill which you cannot control anyway, I will go through some potential tax planning strategies that may apply to you due to the changes. This post is intended for people who either prepare tax returns by themselves or at least have a basic understanding of how the U.S. tax system works. If you have any questions or not sure about any terms or strategies mentioned here, I recommend you consult a tax professional for your specific situation.
Strategy 1: If you are able to use itemized deduction on your 2017 tax return, you should probably consider paying your 4th quarter estimated state income tax and the second installment of your property tax by the end of 2017. Otherwise, starting in 2018, the total deduction allowed for state & local income tax & property tax will be limited to $10,000.
If you don't think you could use itemized deduction in 2018, you could also pay some expected medical expenses and make some planned charitable contributions by the end of 2017.
If your total expected state & local income tax & property tax in 2018 would be lower than $10,000, you could consider underpaying some of them next year and make your 2019 payment equal or higher than $10,000 to take advantage of a higher itemized deduction in 2019 if possible.
Strategy 2: If you are considering or have considered using the 529 plans to fund your kid's future education expense in a tax-efficient way, now the 529 plan becomes an even more attractive option compared to the Coverdell Educations Savings account (ESA). Starting in 2018, just like ESA, the money in a 529 plan can also be used for elementary and secondary school expense in addition to the higher education.
Strategy 3: If you are not satisfied with your employer-provided health insurance benefits or you don't have any health insurance through work, I recommend you reconsider all the health insurance options in the market next year for 2019, especially for people who are young and healthy. Starting in 2019 (not 2018), the tax penalty for people who do not have Obamacare compliant health insurance will be removed.
Strategy 4: If your job duties qualify for the definition of the independent contractor, it may be beneficial to be treated as a self-employed rather than an employee. Starting in 2018, pass-through businesses like sole proprietors, partnerships, LLCs, or S corporations will enjoy a 20% deduction from Qualified Business Income, certain limitations apply. In other words, only 80% of your Qualified Business Income will be subject to income tax if you are self-employed and meet all the requirements whereas 100% of your salaries will be subject to income tax if you are an employee.
Strategy 5: If you own a pass-through business and reinvest a lot of the business profits back to it, you may save some income taxes by revoking S-Corp election or have the partnership/LLC taxed as a C corporation. Starting in 2018, the federal income tax rate for a C corporation will be a flat 21% compared to your individual marginal tax rate which is probably higher.
All the strategies mentioned above should be analyzed and implemented based on your specific situation. If you have a tax professional providing help for your taxes, you could discuss these with him/her and see if any strategies could be applied to you. Hopefully, you could come up with a good tax plan and take actions before it's too late.