It is that time of year when everyone asks, "What can I do before year-end to lower my tax bill?" This year is no different than previous years except for one minor detail – Congress just finalized tax reform. The majority of these changes will not be effective until Jan. 1, 2018, however, they will still impact the last-minute tax decisions you make for 2017.
Before we tackle the steps you should be taking before year-end, you need to understand the following three points...
What are some of the proposed tax changes?
Some of the tax reform changes include:
- Lower tax rates
- Limitation on state income tax deductions and property tax deductions
- Repeal of miscellaneous itemized deductions, including unreimbursed business expenses, tax preparation and investment fees
- Repeal of deduction for personal exemptions
- Increased standard deduction to $24,000 for married couples ($12,000 for singles).
What is Alternative Minimum Tax (AMT)?
Have you heard the term “flat tax”? Well, AMT is a close version of a flat tax. Under our current tax system, individuals calculate their federal tax liability based on regular tax laws followed by AMT laws and are required to pay under which system calculates the higher tax. Our regular tax system has multiple tax brackets and allows for the deduction of state income taxes, personal property and real estate taxes, miscellaneous itemized deductions and personal exemptions (all of the items noted in the above section that Congress was looking to repeal or limit). Our AMT system has two tax brackets and does not allow for the deduction of state income taxes, personal property and real estate taxes, miscellaneous itemized deductions and personal exemptions. Yes, our AMT system is mainly income-based with few deductions thus the close resemblance of a flat tax.
Now that you have a better understanding of the tax reform changes and AMT, you can speculate with me as to what Congress is trying to accomplish and what tax planning steps you should look at before year-end. Congress revised our regular tax system into an AMT system by repealing most itemized deductions, thus a flat tax with more tax brackets.