As we approach the end of 2017 our attention turns to year-end tax planning strategies that will take advantage of the opportunities offered under the current and future income tax laws. We will explore some tax planning opportunities in two blog posts; this post will address individual taxes and our next post will look at small-business taxes.
Unfortunately, the timing and impact of any potential tax law changes are not known at this time and possibly won’t be clear until after the end of the year. Although we cannot be sure what tax law changes will occur, one thing appears certain, there will be tax law change and/or reform and the consensus is that most taxpayer’s will be affected. The uncertainty should not make you think that you don’t or can’t plan for your 2017 and 2018 taxes.
So, what are some tax planning ideas?
If your goal is to reduce your 2017 tax burden, then it is suggested that you consider the following:
Take full advantage of any employer provided benefits that decrease your taxable income, such as retirement plan contributions and medical savings or reimbursement plans. These benefits carry a double benefit in that the more you contribute into your retirement account, the more employer match is possible, and you now have more money growing tax deferred. The medical expense benefits are beneficial in that they allow you to pay for medical expenses with pre-tax dollars and many taxpayers do not get to deduct out of pocket medical expenses since they do not exceed the minimum threshold.
If you believe you will have enough medical expenses for them to be deductible, then by all means, pay as much of your medical bills as you can by the end of the year. Keep in mind that in 2017 your medical expenses must exceed 10% of your Adjusted Gross Income (AGI) to be deductible. The threshold for those 65 or older is 7.5% of AGI. Also, any amount charged on a credit card is deemed to be paid for income tax purposes, even if the credit card bill is not paid until the following year. Medical deduction is one of the items that is currently on the chopping block with the new tax proposal.
Accelerate your deductions. If you have a charitable interest, then make your charitable contributions before the end of the year. The same goes for payment of property taxes and employee business expenses.
Defer your income. If possible, delay receipt of income; unless you own your own business, this technique may be hard to accomplish. Delay the closing on a property or stock sale that will produce a gain.
Explore the opportunity to lock in capital losses on your non-retirement stock and mutual fund holdings. You can use the losses to offset capital gains you have realized in 2017 plus deduct up to $3,000 (married filing joint limitation) of net loss each year. If you repurchase the security that you sell within 30 days, the loss will be disallowed. Please discuss this option with your financial advisor.
If you think you will owe taxes for 2017, consider paying the state income taxes due before the end of the year. In doing so, you will be able to include those taxes as a Federal itemized deduction in 2017. However, you need to consider the Alternative Minimum Tax (AMT) affect (see next paragraph). Both the State Income Tax deduction and AMT might be repealed with the new tax proposal.
AMT has been around for many years and each year many more taxpayers are subject to it. You are required to calculate your tax obligation using AMT rules that do not allow the same deductions as Regular income tax. One of the most common adjustments is that AMT does not allow you to deduct Taxes Paid, such as state income taxes, real estate taxes or personal property taxes. There is an annual exemption available under AMT that allows most taxpayers to avoid the tax. Being subject to AMT can easily increase your Federal income tax burden by several thousand dollars. Therefore, always consider not only the Regular tax impact of your year-end actions but also the AMT impact.
We are not operating in a friendly income tax environment, so it is prudent to evaluate your personal situation and seek professional help to sort out your options. The bottom line goal remains to minimize the tax burden in a way that is consistent with your overall financial goals. Proactive year-end tax planning is the cornerstone of a good tax strategy.
The above recommendations are general in nature and should not be used for your specific tax planning without the consultation of a professional tax advisor.