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Plan now for tax changes in 2018

Professionals call it tax planning. Analysts call them tax games. We're calling them tax hacks. Every tax bill has little incentives or loopholes that encourage some behaviors and discourage others. The bill that is expected to come up for a final vote next week is no different: It is full of little opportunities to make money -- or at least save some.

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QUOCTRUNG BUI
and
MARGOT SANGER-KATZ, New York Times

Professionals call it tax planning. Analysts call them tax games. We’re calling them tax hacks. Every tax bill has little incentives or loopholes that encourage some behaviors and discourage others. The bill that is expected to come up for a final vote this week is no different: It is full of little opportunities to make money — or at least save some.

We’ve put together a list of some of the most interesting and useful tricks, with help from some of the country’s leading experts in law and finance. This isn’t meant to be real tax advice — for that you’ll need to hire a professional — but it does shed light on the key features (or holes) in the Republican bill.

Tax rates before and after

There are still seven income tax brackets, but lawmakers have tweaked the rates and the income levels for each.

"It appears most people will benefit," said Raleigh CPA Ben Micham. "The rates have all shrunk."

Under current law, the seven tax brackets are 10 percent, 15 percent, 25 percent, 28 percent, 33 percent, 35 percent and 39.6 percent.

The bill released on Friday afternoon by the Tax Cuts and Jobs Act Conference Committee pegs the new rates at 10 percent, 12 percent, 22 percent, 24 percent, 32 percent, 35 percent and 37 percent.

The income tax rate will dip for all but the lowest earners, and the benefit is boosted with the doubling of the standard deduction.

Now: If you’re single, the standard deduction is $6,350. Add in exemptions, and you’re up to $10,400.

Married without children? That’s $12,700 for the deduction and $20,700 with exemptions.

If you’re married with two children, the deduction-plus-exemptions figure goes up to $28,700. There is also a $1,000 tax credit per child.

For lower income families, up to $1,400 would be refundable. For higher income families, many more qualify.

"If you make under $400,000, you'll get the child tax credit, which is for children under 17," Micham said.

You can also generally deduct the amount you pay for state and local income taxes, including property taxes, on your federal income tax return. You can also deduct the interest you pay each year on mortgage debt up to $1 million, a cap that can cover multiple homes. Plus, you can generally deduct up to $100,000 in interest you pay on a home-equity loan or line of credit.

New plan: The standard deduction is temporarily increased to $12,000 for singles and $24,000 for married couples filing joint returns, and taxpayers may deduct only up to $10,000 total, which may include any combination of state and local taxes, including property taxes (also sales taxes).

The child tax credit is increased to $2,000 for each child — and up to $1,400 of that can be delivered in the form of refundable credit, which means taxpayers can receive money back even if they have no tax liability. (Taxpayers may also reduce their tax bill by up to $500 for other dependents who are not children.)

But that all changes in 2025, when the deductions and exemptions revert to current law.

Many elements of the bill that involve doing something right now, in the final days of 2017, to maximize deductions or other benefits before the rules change. Others would take longer to pull off but could have lasting payoffs, reaching into the next generation.

Here are some moneymaking opportunities in the legislation, ranked by degree of difficulty.

Ways to benefit from the tax plan

Difficulty: Easier
If you’re going to give to charity next year, consider donating now instead.

If you’re feeling generous, you’re likely to get a reward if you donate now, under the current tax system. Because of changes to tax rules, most families won’t be able to itemize deductions and thus won’t get much tax benefit from charitable giving once the new system kicks in. So it is probably better to give now, when you can write it off as part of an itemized tax return.

The same logic applies to any other expense that you can currently itemize: The deductions are likely to be worth more to most people this year than in the future. If you can afford to pay some of your mortgage or student loan bills early, including interest — or pay for big, anticipated medical expenses — you will probably get a bigger benefit if you do it this year. The downside to these strategies: “You have to write a check,” said Steven Rosenthal, a senior fellow at the Urban-Brookings Tax Policy Center. “That’s always true in life — you have to have money to make money.”

Difficulty: Moderate
Get lucky with the timing of your inheritance.

The bill makes big changes to the estate tax that will influence when it would be best to inherit a large fortune, should one be coming your way. Currently, estates worth more than $5.5 million are subject to a 40 percent tax, while smaller ones can be transferred with no tax at all. The bill would double that limit, beginning next year, then roll it back to the current level in 2026. “It’s the ‘Weekend at Bernie’s’ Act of December 2017,” said Daniel Hemel, an assistant law professor at the University of Chicago who studies taxes. “And the ‘Throw Momma From the Train’ Act of December 2025.”

Move to New Hampshire. (Or Alaska. Or Texas.)

The tax bill would limit the amount of state and local taxes that Americans can deduct from their incomes before paying federal taxes. Under the Republican plan, taxpayers would be able to deduct only $10,000 in such taxes. The burden of this change will fall heavily on higher-income residents of states with relatively high local taxes — think California, New York and New Jersey. These people will fare relatively worse as more of their income will become subject to federal taxes.

But there are other states that have relatively low state and local tax burdens. Living in one of those places could insulate you from the change, and increase your tax reduction. According to an analysis from the Tax Foundation, a few states with the lowest local taxes include portions of Alaska, New Hampshire and Texas. May we suggest New Hampshire? It has lovely mountains.

If you’re going to move, consider doing it now. Among the many tax credits that would be repealed under the tax bill is one for moving expenses.

If you insist on remaining in a high-tax state, try to earn more this year.

The tax bill will limit the degree to which people can deduct state and local taxes from their income before calculating federal taxes, starting in the 2018 tax year. That means that, for people who pay high local taxes in such places and itemize on their return, there’s an advantage in shifting as much income into this year as possible. The more you earn before the switch, the more you’ll pay in state income tax, and the more you can discount your federal taxes — an opportunity that will be more limited next year.

There are a few maneuvers that might prove useful. If you work for a company that tends to pay large annual bonuses, like a hedge fund, ask if you can get your bonus before the end of the year. If you have valuable stock you hope to sell in the near future, you may want to do it now. (There are other changes that also make stock selling now a good idea, assuming you plan to sell it soon anyway.)

A more complex maneuver might be converting your traditional IRA into a Roth IRA, a move that will increase some people’s income now and lower their tax liability later.

These strategies make sense only in places where local taxes are high, and for taxpayers who are not paying the alternative minimum tax. “If you were in Florida, it wouldn’t pay to do this,” said Bob Gordon, the president of Twenty-First Securities, a New York-based brokerage and money management firm.

Upgrade your private jet.

The Senate bill would tighten rules for transactions known as 1031 swaps. Under current law, you don’t have to pay taxes on capital gains you earn from selling a wide variety of business assets, as long as you quickly use the proceeds to make another, similar purchase. The provision is most often applied to real estate transactions — think selling one office building and buying another — but other kinds of assets have been allowed in swaps. They are used often by art dealers and collectors. The broad rules have also made them a good way for corporations or individual private jet owners who use their planes for business as well as pleasure to sell an older, depreciated jet and buy a new one without having to worry about tax consequences. (If you really want to get in the weeds, depreciation rules for private jets make this a particularly useful maneuver.)

Starting next year, the tax law would limit 1031 exchanges to real estate transactions only — meaning this is a good time to upgrade your jet, if you’re going to do it. “I think it’s going to affect the private jet industry,” Gordon said, anticipating more transactions this year and fewer in the future.

If you send your children to private school, open a 529 account.

Currently, such tax-free accounts are devised to help parents save money to pay for their children’s college educations. But the tax bill would allow parents to use money from the accounts to pay for up to $10,000 a year in K-12 private education and home schooling as well.

As Ben Miller, the senior director for postsecondary education at the liberal Center for American Progress, notes, the change could have a number of valuable effects for families that use it. It would shield private school tuition from federal taxation, even though there would be less time for the money to accrue, undermining the account’s original intent as a savings vehicle. The change may also make private school tuition subject to state tax breaks in many states — since several protect 529 savings from state taxation as well. In high-tax states, the savings could come to more than $500 a year, even if tuition money immediately passes through the 529 account.

The application of 529 funding to home schooling expenses could help families pay for some household expenses tax free. Though some more elaborate schemes involving travel-based home schools would probably be disallowed, Miller said in an email, “you could probably still get state-tax-free internet service and computer purchases this way.”

Turn yourself into a pass-through business.

Our colleague Neil Irwin, who writes on economics and business, is paid as an employee of The New York Times. But under the Senate tax bill, he’d be much better off turning himself into a business and collecting the equivalent of his earnings and benefits as payments to a hypothetical new company, Irwin Scribblings, LLC.

Irwin’s company would be joining the ranks of the most common type of business in America: the pass-through. In typical corporations, the company’s profits are taxed twice: once on the company’s income and again on the dividends passed on to its shareholders. But in pass-throughs, the company’s income is essentially “passed through” to the owner and taxed at whatever tax bracket the owner is in. Most kinds of freelance and consulting businesses operate as pass-throughs. So do companies that are organized as partnerships, like law firms, dental practices and many real estate firms.

If you run a pass-through business that earns up to $250,000 a year if you’re single ($500,000 if you’re married), you get a 23 percent tax break on all profit that comes through your company — in other words, only 77 percent of that income would be taxed. That might make it worthwhile for some workers to switch from salaried work to freelance, though there are a few complications, like obtaining health insurance and getting your employer to agree. Those earning more might still be better off as a pass-through, but there are more rules about what types of income qualify for the deduction.

This shift is something that actually happened. In 2012, Kansas instituted even more generous pass-through rules, leading many people — perhaps 1 out of every 500 workers — to persuade their employers to pay them this way.

Difficulty: Hard
Turn yourself into a corporation.

If you’re really wealthy and earn a lot of money you don’t plan on spending soon, you may want to turn yourself into a different kind of company: a corporation, instead of a pass-through. As a C-corp, your company’s earnings will be subject to the 20 percent corporate tax, a big reduction from the top individual rate, even with the pass-through discount. And, under the bill, corporations are allowed to deduct all state and local taxes, which individuals and pass-throughs can’t. The downside comes if you want to pay those earnings to yourself; they would become subject to a dividends tax.

If you think you’ll need the money right away, and earn less than $500,000, a pass-through may be better for you. But if you will never spend the money, you can leave your corporate earnings to your heirs, who won’t have to pay such taxes for cashing out. And if you don’t need much of it for a long time, you can at least avoid paying higher taxes on the savings until you withdraw them. “If you’re wanting to save a lot of money, you might want to become a C-corp, and if you want to spend it right away, you would want to be a pass-through,” said Lily Batchelder, a law professor at who has also worked on tax policy in the Senate and for the Obama administration’s National Economic Council.

Sell your company some art

Imagine that you’re a wealthy person in the top tax bracket, and you own a genuine Rothko that has become worth millions more than you bought it for. Selling, you’d have to pay a huge tax on the painting’s increase in value. Instead, you could exchange the painting with a company you own for shares, a transaction that wouldn’t be taxed. Then, have the company sell the painting, paying only the new, low 20 percent corporate rate. If you pass the shares onto your heirs, they won’t have to pay any taxes on them.

What the plan is exploiting is that under the new tax system, the corporate tax rate would be much lower than other rates. All the transactions, like the tax-free exchanges, are legal under the current system. It’s just that having the huge tax benefit would make playing these tricky games more valuable.

Consider a career in tax law or corporate accounting.

The new rules mean that lots of people are going to need advice about how to restructure their finances and their business organizations. “This isn’t necessarily simplification,” said Ron Dabrowski, a principal in the Washington National Tax practice of KPMG LLP, who has worked on tax policy for the Internal Revenue Service, for the Treasury Department and on Capitol Hill.

Dabrowski noted that the tax bill restructures vast parts of the tax code and layers on new rules at different times: “As people try to figure out what the law is and what it means, professional services are going to be needed.”

The faster you can set up your accounting or law practice, the better. The highest demand for professional advice is likely to come in the next few years, as people learn the new rules. But the continuing complexity of the tax system means that your career change could pay off in the long term.

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