Congress appears ready to enact major tax reform that could potentially make fundamental changes in the way you and your family calculate your federal income tax bill, and the amount of federal tax you will pay. Below are some steps that you can take right now to take advantage of tax breaks that may be heading your way, and to soften the impact of any crackdowns. Keep in mind, however, that while most experts expect a major tax law to be enacted this year, it’s by no means a sure bet. So keep a close eye on the news and don’t swing into action until the ink is dry on the President’s signature of the tax reform bill.
Lower tax rates coming. Both the tax bill passed the House of Representatives and the one before the Senate would reduce tax rates for many taxpayers, effective for the 2018 tax year. Additionally, businesses may see their tax bills cut, although the final form of the relief isn’t clear right now. The general plan of action to take advantage of lower tax rates next year would be to defer income into next year. Some possibilities follow:
• If you are an employee who believes a bonus is coming your way before year end, consider asking your employer to delay payment of the bonus until next year.
• If you are thinking of converting a regular IRA to a Roth IRA, postpone your move until next year. That way you’ll defer income from the conversion until next year and hopefully have it taxed at lower rates.
• If you run a business that renders services and operates on the cash basis, the income you earn isn’t taxed until your clients or patients pay. So if you hold off on billings until next year-or until so late in the year that no payment can be received this year-you will succeed in deferring income until next year.
• If your business is on the accrual basis, deferral of income till next year is difficult but not impossible. For example, you might, with due regard to business considerations, be able to postpone completion of a job until 2018, or defer deliveries of merchandise until next year. Taking one or more of these steps would postpone your right to payment, and the income from the job or the merchandise, until next year. Keep in mind that the rules in this area are complex and may require a tax professional’s input.
• 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.