Last minute tax moves should be considered very carefully, especially now, given the newness of tax reform laws. Contact your BGW advisor for assistance in dealing with your specific situation.
Taxes are going to look very different in 2018, thanks to the massive tax reform bill passed and signed last week. The corporate tax rate is falling, federal income tax brackets are adjusting, and there are big changes to your ability to itemize deductions. Is there anything you should be doing before the ball drops in Times Square Sunday night? Here are just a few things to consider.
Defer income to 2018.
If you’re a freelancer or self-employed, you may want to defer some income into next year. That’s because you may save money under the new lower rates set forth in the tax reform plan.
You can defer income as long as you haven’t received it by December 31st. Not cashing a check issued to you prior to the new year won’t count. The tax law requires you to count any income that’s currently in your possession during the current year.
Contribute to Your HSA and IRA.
If you have a high deductible plan or have been considering opening one, it may be time to put some money into it. The tax rate changes make this year’s contributions worth more than they will be next year.
The deadline for contributing to your HSA account is December 31st. Even if you don’t have major medical expenses, an HSA can still be a great tool to invest money for the future. Once you reach 65, it can actually be used just exactly like a Traditional IRA for retirement. The limit for HSA contributions is $6,750 for families and $3,400 for individuals for 2017. The catch-up contribution for those 55 and older allows an additional $1,000.
The deadline for Traditional IRA contributions isn’t until April 15th to still be able to deduct them on the 2017 tax return, but make sure you’re prioritizing setting aside this money.
Prepay your property taxes.
The IRS announced yesterday it would allow 2018 taxes to be deducted from 2017 taxes provided they were assessed and paid by December 31, 2017. So, if your local tax authority will allow it, and you won’t be able to itemize next year because of the higher standard deduction going into effect in 2018, AND you pay a high amount in property tax, this may make sense. New tax legislation signed into law by President Trump last week established a new $10,000 cap on the amount of state and local taxes that can be deducted from income before determining federal tax liability.
Note that this planning opportunity will only apply if you’re not subject to Alternative Minimum Tax in 2017.
Accelerate state taxes.
State taxes prepaid for 2018 are specifically not allowed to be deducted under the new tax laws. However, if you still owe a state tax estimate for the 2017 tax year, paying it by December 31st, 2017 rather than the standard January 15th due date is likely a good idea to maximize your tax savings.
State tax deductions will also apply only if you’re not subject to Alternative Minimum Tax in 2017.
Make one more mortgage payment.
The standard deduction amount will be higher in 2018 and likely more beneficial than itemizing, so consider paying your January mortgage payment before year end. Similarly, make an additional payment on (or payoff if you can) any home equity loans you may have.
Wait on that Roth conversion.
If you were thinking of doing a Roth conversion before year-end, wait. Rates will be lower in 2018. Also, consider recharacterizing a Roth conversion you’ve already done.
Donate 2018 charity now.
Charitable contributions will remain deductible under the new tax laws, but donating any 2018 earmarked funds before the end of 2017, when you must itemize, may provide a larger benefit to individual taxes, when you may not itemize and take the standard deduction. Basically, if you expect that your allowable itemized deductions will be less than the new standard deduction amounts ($12,000 for individuals, $24,000 for married couples and $18,000 for heads of household), contributing more by the end of the year will result in a tax benefit. Going forward, if you’re close to being able to itemize, you can lump several years worth of charitable contributions together in one year.
Pay As Many Deductions Subject to 2% Floor as Possible
The opportunity to take miscellaneous deductions is being eliminated in 2018. This includes unreimbursed employee business expenses such as a home office, vehicle costs, and other similar expenses. It also includes tax preparation, job search expenses, investment management and tax planning fees. (This elimination of unreimbursed employee expenses only affects taxpayers who claim employee-related deductions on Schedule A. If you file Schedule C, as a business owner, your business-related deductions won't be affected.) So, pay as many of these expenses as possible, and if necessary, before the year-end. You won’t see these tax benefits again.
Optimizing your miscellaneous 2% deductions will only provide a tax benefit for you if you’re not subject to Alternative Minimum Tax in 2017.
If you're not sure how tax changes are affecting you, give us a call. While there are a million online tax calculators out there providing a general picture of your 2018 finances, nothing replaces the sound advice of your CPA. We’re here for you. Please reach out.