With January rapidly approaching, it’s time for taxpayers to reflect on the past year’s finances. Specifically, it’s time to consider which strategic planning techniques can be implemented before year-end to maximize available tax savings on 2017 tax returns.
Though year-end planning is important to consider in all years, it is especially significant for 2017; tax reform will likely pass before the end of the year. If passed, tax reform will impact years beginning January 1, 2018.
Here are five year-end tax planning ideas for individual taxpayers for 2017:
1. Charitable Giving
Much of the language surrounding tax reform suggests lower marginal tax rates for individuals beginning in the 2018 tax year. Therefore, any contributions made to charitable organizations before year-end may provide tax savings in 2017.
These savings may become unavailable, or significantly reduced, in future years. Combining tax savings with the ability to support your favorite causes and organizations is a win-win. Be sure to verify that you’re only making contributions to qualified charitable organizations to meet the deduction requirements on your 2017 tax return.
2. State and Local Taxes
On Federal returns, individual taxpayers are currently eligible to deduct all income taxes paid to state and local authorities. This deduction will likely be capped beginning next year, with a proposal allowing only $10,000 to be deducted per year.
In order to take full advantage of existing tax law, consider making any needed payments to state and local authorities before year-end. December is a great time to pay fourth-quarter estimated taxes, which aren’t typically due until January 15th, or any payments you anticipate being due in April with your return or extension.
3. Other Itemized Deductions
The standard deduction will nearly double under the proposed tax legislation, with amounts increasing from $6,350 to $12,000 for single filers, and from $12,700 to $24,000 for joint filers. This increase will substantially reduce the number of taxpayers who will benefit from itemizing their deductions. Therefore, individuals should consider accelerating any deductions they can into 2017.
Wherever possible, consider paying bills for medical expenses, investment fees, mortgage interest, unreimbursed employee expenses, and any other allowed deductions before December 31. If you are planning to make any large purchases that require paying sales taxes, consider purchasing before year-end to claim the sales taxes as a deduction.
4. Capital Gains
Though not directly related to tax reform, it is always a good idea to analyze your investment portfolio before the end of the year.
If you have taxable capital gains, consider selling investments that have become worthless or have significantly decreased in value since the date of purchase. Selling these investments at a loss will allow you to offset your other capital gains and will ultimately provide tax savings.
If selling worthless investments puts you in an overall capital loss position, you are able to deduct $3,000 in losses against ordinary income. Any remaining losses will then be carried forward for deductibility in future years.
5. Income Deferral
If you suspect that you’ll be in a lower tax bracket beginning with the 2018 tax year, evaluate if you have any methods of deferring income. For example, if you are expecting a year-end bonus, it may be acceptable for your employer to hold payment until January.
Additionally, consider putting more money into tax-deferred retirement accounts. If you’re already retired, consider delaying taxable distributions—other than the required minimum amount—until 2018.
Other ideas include delaying self-employment income or postponing the sale of appreciated investments until next year. There are many ways of deferring income into a future tax period. Understanding which methods are available to you will help with strategic planning.
Though there is still major uncertainty surrounding the details of tax reform, now is the time to develop strategy for year-end tax planning. The 2017 calendar year is unique and complex due to the reform bill that is currently being finalized, and we recommend that individuals take a thorough look at their options in the next few weeks to ensure maximum benefit. Stay tuned for further information.
If you have any questions or need additional tips, contact your Clark Nuber advisor or Celia Davis.
Celia Davis is a manager in the firm’s tax practice. She works with not-for-profit organizations and high net worth individuals.
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