Gallet Dreyer & Berkey, LLP | Year End Tax Planning Concepts
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Year End Tax Planning Concepts

Although year-end tax planning always presents challenges, recent tax reform proposals have created a unique set of challenges for taxpayers.  Despite the current uncertainty concerning tax reform, it is important to remember that the proposals are just that: proposals.  (As this memo is being released both the House and Senate have passed their own version of a tax bill.  The two versions have significant differences which the House and Senate must now reconcile.)  This memo highlights several potential income and estate tax-saving opportunities to consider based on current tax law, as well as strategies to receive the maximum benefit under current law and/or protection from any possible future changes.  As with planning opportunities it is important to first do the math to see if any potential opportunity will result in actual savings.  The Tax, Trusts and Estates practice at Gallet Dreyer & Berkey, LLP stands ready to assist you in making these determinations.


Management of Income
A key component of year-end tax planning is the “management” of income. An individual’s income often directly impacts their ability to benefit from allowable deductions and exemptions.  Many deductions are deductible only if they exceed the applicable thresholds. For example deductions for medical expenses must exceed 7 ½% of Adjusted Gross Income (“AGI”). Miscellaneous deductions generally must exceed 2% of AGI.  Itemized deductions, which are otherwise deductible, (other than charitable contributions) and exemptions may be limited by AGI.  However, not all deductions are limited by AGI.  Contributions to retirement plans are tied to income.  Generally, the greater the income being reported, the greater the deduction.  Other computations are also income dependent, principal is the Alternative Minimum Tax (“AMT”).  The impact of AMT may permit one to increase the amount of taxable income they are able to recognize in the current year (reducing the amount they may need to report the following year) without increasing the amount of tax payable in the current year.
Retirement Plan Contributions
One of the most effective ways to reduce your  income is though contributions to a retirement plan, self-employed retirement account or to an IRA (each of which is subject to a different contribution limits - and in the case of a Traditional IRA or Roth IRA, different income phase-outs ranges).  We suggest that you maximize your retirement contributions, while remaining cognizant of the limitations, to take full advantage of the associated tax-savings opportunities.  You will reduce your current tax obligations while building for retirement in a tax advantaged manner, since the income that you earn on your retirement assets will not be taxable until you withdraw amounts from the plan when you retire, at which time the withdrawal will be subject to income tax at your then income tax rate.
Taxpayers should first determine whether they would benefit more from the standard deduction or from itemized deductions.  Of course, if your 2017 itemized deductions are greater than the standard deduction ($6,300 for individuals, and $12,700 for married couples filing jointly), you will benefit by itemizing.  However, the recent tax reform proposals point to the potential end or at least reduction of some of the most popular deductions (i.e., state and local income taxes, real estate taxes and mortgage interest) while at the same time substantially increasing the standard deduction.  These potential changes might make these expenditures less valuable in 2018.  Those potentially affected should more than ever consider the various ways in which they can minimize their tax liability by maximizing their deductions.  Based on the current state of law, in tandem with the proposals being negotiated in Congress, we suggest you carefully consider the following two itemized deductions:
State and Local Income and Real Estate Taxes: The deductibility of state and local income and real estate taxes is currently in limbo as Congress negotiates the tax reform legislation proposed.  Given the potential elimination of these significant deductions, individuals may benefit from accelerating payment of these taxes before December 31st

Charitable Contributions: Charitable contribution deductions are the only deductions that remain intact in all tax reform proposals, in fact certain proposals increase the amount that will be currently deductible.  Even though deductions for charitable contributions will likely remain available in 2018, the potential increase in the 2018 standard deduction and decrease in the tax rate may make charitable deductions more valuable in 2017 than they will be in 2018.

Tax Preparation Expenses and other Miscellaneous Deductions.  Under the proposals, the payment of Tax Preparation Expenses will no longer be allowable nor will any of the other miscellaneous deductions that were traditionally available to the extent they exceeded 2% of AGI, i.e., investment management fees, job hunting, uniforms, union dues, etc. 
Acceleration of such payments before December 31, 2017, may allow you to take advantage of these significant deductions even if such deductions are eliminated in 2018. 


It is always beneficial to review your estate plan at year-end.  Given the ever-changing nature of our tax laws, there is always the possibility that your estate plan may be in danger of becoming outdated or ineffective.  Year-end is a good time to reflect upon your estate plan and confirm that it is current, that estate tax considerations have been addressed and whether your survivors will be able to efficiently inherit your assets.  We offer the following questions to guide you in the analysis of your current estate plan:
  • Are your appointments (executors, trustees, guardians, etc.) up to date?
  • Have there been any significant life changes, such as births, deaths, marriages, divorce, etc.?
  • Have your assets/net worth changed significantly, for better or worse?
  • Has there been a change in your marital status or the marital status of your children or other beneficiaries?
  • Have you become involved in a new business venture (which may also give rise to asset protection issues)?
  • Have you terminated your interest in an old business venture?
  • Have you moved to a new state?
Even if your estate plan accurately reflects your estate wishes, there may be strategies to utilize prior to year-end that will limit your exposure to the estate tax. 
Lifetime Exemption
For 2017, the lifetime estate and gift exemption is $5,490,000.  This amount will be increased to $5,600,000 in 2018.  Any portion of the exemption used as a result of lifetime gifts reduces the exemption available for the estate tax upon your death.  For married taxpayers, any portion of the exemption that was not used by the estate of the first spouse to die is then added to the surviving spouse’s exemption.  This is referred to as “portability.”  A married couple jointly owning combined assets of less than $10,980,000 ($11,200,000 beginning in 2018) will likely not be subject to the estate tax.  However, it is important to remember that proper planning is still critical.  The entire $10,980,000 ($11,200,000) exemption is not available at the first death.  The full amount is only available to shelter assets passing to or owned by the second spouse to die.  To the extent that assets are owned by the first spouse to die exceed $5,490,000 and pass to someone other than the surviving spouse or to charity, estate tax will be payable.  It is also important to understand that portability is a Federal Estate Tax concept and has not been adopted, in whole or in part, by many states such as New York.
Annual Exclusion
The annual gift exclusion is an effective estate planning strategy that allows you to gift up to $14,000 (a combined $28,000 if married) to as many individuals as you choose, without reducing your lifetime exemption amount ($10,980,000, in 2017, $11,200,000 in 2018.) These amounts will increase to $15,000 and $30,000, respectively beginning in 2018.  Because the annual exclusion is applied on a per-donee basis, you can leverage the exclusion by making several gifts to multiple donees.  The value of your estate is decreased, dollar for dollar, by the aggregate value of excluded gifts made in each tax year.  We realize that gifting, especially involving non-cash assets, is not a simple concept, and therefore we would be happy to advise you on any gift calculations and/or prepare the requisite gift memoranda for certain non-cash transactions.
Discounted Transfer of Interests in Entities
In August 2016, the IRS issued proposed regulations that would have eliminated the ability to discount the value of transfers of interests in closely held entities such as Limited Partnerships (LPs) and Limited Liability Companies (LLCs) - to family members.  Recently, Treasury announced that it would not pursue the regulations, thereby, at least temporarily, preserving the ability to transfer discounted interests of closely held entities to family members.  This strategy, known as “leveraged gifting” decreases the value of your estate and is therefore a popular strategy among estate planners to eliminate or substantially decrease estate taxes.  Leveraged gifting allows you to maximize gifting while decreasing the value of your estate yet retaining control of the assets owned by the LP or LLC.  In order to avoid the estate tax while retaining control of the assets, it is imperative that extreme care be exercised in structuring the transfer and the relationship of the parties.
Given the extensive debate surrounding leveraged gifting, the future of this estate planning strategy is unknown.  Thus, we recommend that you contact the Tax, Trust and Estates Practice at Gallet Dreyer & Berkey, LLP to help you determine whether you should take advantage of this recent change and make gifts of LP and LLC interests to your heirs while you still can.