Year-end tax planning always presents challenges, but in 2017, particularly so. A great deal of uncertainty exists around the two tax reform proposals currently before Congress, not just whether changes will actually occur, but when. Some proposed changes, if passed, will affect years 2018 and beyond. Some could be applied retroactively to 2017. Some proposed changes may get tossed out completely. How can we give out tax advice when everything’s so up in the air?
Go With What You Know
The key to effective tax planning in uncertain times is to plan based on the laws currently in effect, be educated about what’s potentially on the horizon, and then be ready to make the necessary changes when and if the time comes. There’s just no other way around it. Individuals and businesses both must follow these guidelines.
The good news is that not much has changed in terms of tax rules from 2016 to 2017. Inflation adjustments for things like tax brackets, the standard deduction, retirement plan contributions are present, but we generally see those every year. So, much of our year-end tax planning advice from previous years is the same:
- Consider making charitable contributions before Dec. 31., particularly appreciated stock, which will eliminate the capital gain, or from your IRA if you’re 70 ½ or older (other requirements apply) so that your annual distribution is eliminated from your income. While we do think the charitable deduction will live through tax reform, it may be subject to higher income limits. Take advantage of it now.
- Maximize your 2017 retirement contributions.
- Consider selling investment losses in your portfolio to offset any realized capital gains.
- Gift money to family or others by year-end to reduce your taxable estate. Individual taxpayers may gift $14,000 to each person, married couples may gift up to $28,000 to each individual.
- Check withholding and estimated tax payments now and increase withholding if necessary to avoid costly underpayment penalties.
- Plan for your small business by using a Section 179 expense write-off (equipment must be placed into service by 12/31/17) or by taking advantage of the R&D tax credit. Both options are detailed here in our blog from last year.
Prepare for Change
Tax reform, in some form, is probable. Most likely, we’re going to see lower tax rates and greater limitations on deductions. Some deductions, such as the deduction for state and local taxes, we could lose altogether. Based on the chatter we’ve been following in Washington, here are 3 things we think are particularly important to consider this year:
- Accelerate deductions, defer income.
This isn’t uncommon advice from us, but with the possibility of a rate cut on the horizon, we’re really pushing for it this year. It is to your advantage to use deductions now while rates are high, and defer income into future years when the tax rates will be lower. Bonus income, wages from an outside consulting job, self-employment income -- basically anything you can live without right now -- are all great to defer. On the deduction side, consider accelerating real estate taxes and other deductible expenses.
- Take advantage of itemized deductions.
Again, typical advice, but certain itemized deductions are on the chopping block in both House and Senate plans. If possible, consider paying qualifying expenses now while the deductions still exist. These include medical expenses and state and local taxes.
- Carefully examine your estate plans.
The estate tax may be repealed. If you use up the $14,000 annual gift tax exclusion per beneficiary (see above), fine, it won’t cost you anything. Just proceed with caution using any gift strategy that incurs gift tax -- just in case the estate tax goes away. Instead, utilize strategies that use lifetime or annual exclusions until we know more about the fate of the gift tax.
Please note that individual circumstances differ and can create different planning strategies. Consult with your BGW point person before making these (or any) tax moves.
Be Our Guest
This is not the year to procrastinate your tax planning or attempt to go it alone (though we never recommend that). But given the pending changes, we urge you attend our next seminar on Year-End Tax Planning on Wednesday, December 13th at 5 p.m. This is the optimal time to educate yourself on pending tax reform legislation (things may even change by then) and position yourself for success in 2018 and beyond. Please join us for this important event.
There is always a certain degree of guesswork that goes into year-end tax planning. This year, it is more so. We’ll continue to monitor changes to the proposed legislation and inform you of changes that affect your personal and business returns. See you on the 13th!