2017 Year End Tax Planning
December is always a good time to evaluate your tax situation and see what you can do to lower your taxes. This year is no different but with the potential tax reform it is more important than usual. With the recent passage of tax reform bills in the house and the senate, Congress is now working on what the final law will be. We think it is likely that a tax reform bill will pass this year, but there may not be a lot of time to react by the time the final law passes.
Since the senate and house bills have some similarities, we have a sense of what the final law may look like. To prepare for the eventuality of a new tax law, there are several things you can consider now to help make the most of your tax planning for 2017 and 2018.
This article intends to address the most common things that will affect individual taxpayers and their year-end tax planning for 2017.
One of the major changes in the tax law may be the elimination of many itemized deductions that are allowed under current law. However, the standard deduction will likely be doubled for most people. With this change, it is predicted that the number of people who will be able to use itemized deductions in 2018 and forward will decrease dramatically.
Specifically, the deduction for state and local income taxes may be eliminated, the deduction for real estate property taxes may be capped at $10,000, and the deduction for miscellaneous deductions over 2% of your Adjusted Gross Income (“AGI”) may be eliminated (e.g. investment advisor fees, tax preparation fees, unreimbursed business expenses, etc.). In addition, the deduction for medical expenses over 10% of AGI could be eliminated, however, there is talk that this deduction could remain. The itemized deductions for mortgage interest, a limited amount of property taxes and charitable donations will probably remain.
The standard deduction will probably increase from $12,700 for a married couple to $24,000, and the standard deduction for a single filer will increase from $6,350 to $12,000. Starting next year, many people will not have enough itemized deductions to reach these limits and will take the standard deduction instead.
Another major change proposed in the House bill is the elimination of the alternative minimum tax also known as the “AMT”.
One of the biggest items in the tax reform is lower tax rates. In general, it appears that tax rates will be lowered across the board for all levels of income.
Here are some basic things you should consider doing before December 31, 2017 to prepare for the ultimate tax reform:
State Taxes: Consider paying all of your 2017 state tax liability before the end of this year. This includes your 4th quarter state estimated tax payment and any estimated amount you might owe in April next year for the 2017 tax year. If you are subject to AMT in 2017, you may not get a federal benefit from paying in 2017, but if the deduction is going away, you wouldn’t get a benefit in 2018 anyway. In addition, you may still benefit from the deduction on your 2017 state taxes.
Real Estate Taxes: Considering that there may be a $10,000 cap on the deduction for real estate taxes in the future, you may want to pay any remaining real property taxes for 2017 before year end. If you are subject to AMT in 2017, you may not get a benefit for the deduction on your federal taxes. However, you may get a benefit on your state tax return. It’s best to check with your tax advisor.
Charitable Contributions: Increase your charitable deductions in 2017 for future years. One way to do this is to set up a Donor Advised Fund (“DAF”) for charity. You can donate as much as you want in 2017, subject to certain tax deduction limits, and then have the DAF disburse funds to your desired charities over the next several years. If you have appreciated stock that you can donate, this is a double tax savings. You will be able to deduct the FMV of the stock donated on your tax return and won’t be taxed on the capital gain.
Miscellaneous itemized deductions: Consider paying your 2017 advisor fees and unreimbursed business expenses before year end. These include your unreimbursed business expenses for your job, tax preparation fees, estate planning fees, and investment advisor fees. If your miscellaneous itemized deductions are over 2% of your AGI, and you are not subject to the AMT, you will be able will increase your 2017 deductions.
Mortgage Interest: Consider paying your January 2018 mortgage payment just before year end to deduct the interest portion of the January payment in 2017.
ROTH IRA Conversions: Roth Conversions may be gone in 2018. If you want to do a Roth conversion or increase your ordinary income in 2017 to match your itemized deductions, you will have to do the conversion before 12/31/17.
Business expenses: If you own your own business consider accelerating your 2017 business expenses by prepaying some of your 2018 expenses before year end.
Income deferral: With tax rates looking like they will be lower next year, you may want to consider, if possible, deferring any income into 2018.
Alimony deductions: The alimony deduction may be eliminated for divorces occurring in 2018 and beyond. Divorce decrees executed before 12/31/17 will be grandfathered and the alimony deductions will continue to be deductible.
Incentive Stock Options (ISOs): In 2018, the AMT may be eliminated. Under the current law, when ISOs are exercised, the inherent gain on the stock is income for the AMT if held for long term purposes. If there is no longer AMT, this will no longer be an issue. So it would be best to wait until 2018 or later to exercise your ISOs.
Investment gains: The Senate bill proposes that going forward, investment cost basis will be calculated using the First In, First Out (FIFO) method rather than a Specific Identification method. You will no longer be able to choose which specific shares will be sold. If you have stock with lower and higher cost basis, you may want to sell the higher cost basis stock before year end using the Specific Identification method. This will leave only the lower cost basis shares remaining. At least you will have reduced your position in that holding without triggering the much larger taxes due than if you didn’t do this and had to sell some of the holding after 2017. The remaining unrealized capital gains could remain in your portfolio for the long term and your heirs would receive a “stepped up” basis at death.
This article is a summary of our current thoughts on the proposed new tax law and does not necessarily cover everything that may apply. Your individual circumstances will matter, and you should consult your advisors regarding any of the above strategies. This article does not constitute tax or legal advice.