Seven Last Minute Tax Moves in Response to Tax Reform
On December 22, President Trump signed the tax reform bill into law. View our tax reform chart to compare the new law with the current tax law.
While President Trump and Congressional leaders have expressed optimism that a final tax reform bill will be passed before year end, 2017 is quickly coming to a close so you may need to complete year-end tax planning in an environment of uncertainty. Here are seven year-end tax planning strategies that respond to the opportunities presented by tax reform.
Strategy 1: Pay 2017 state income taxes
The tax reform proposal would limit the deduction for state income, sales, or real property taxes to $10,000 per year. Consider paying a reasonable estimate of your 2017 state income tax liability before year end (i.e., your fourth quarter estimated tax and the amount you expect to owe with your state income tax return in April) to the extent you do not expect to get a federal benefit for paying state taxes in 2018.
State income taxes are not deductible for alternative minimum tax (AMT) purposes, so the strategy would not be beneficial if you are subject to AMT for 2017.
Strategy 2: Pay 2018 real property taxes
Consider prepaying part or all of your 2018 real property taxes to the extent you do not expect to get a federal benefit for paying the taxes in 2018. Real property taxes are deductible when paid only if the lien date has passed and the amount of the tax has been assessed or estimated.
Check with your county to ensure that the county’s tax satisfies these requirements and to understand how to prepay the 2018 tax, if available. Real property taxes are not deductible for AMT purposes, so the strategy would not be beneficial if you are subject to AMT for 2017.
Strategy 3: Accelerate charitable contributions
The tax reform proposal retains the charitable contribution deduction and doubles the standard deduction to roughly $12,000 per year ($24,000 for married couples filing a joint return). The higher standard deduction is expected to significantly reduce the number of taxpayers that itemize their deductions and thereby reduce the number of taxpayers that will be able to deduct their gifts.
If you expect to claim the standard deduction or be in a lower tax bracket in 2018, then you may want to consider making charitable donations before the end of 2017. There are three ways to further enhance the tax benefits of your giving strategy:
If you are older than 70.5 you may be better off forgoing the charitable contribution deduction in favor of having the custodian of your traditional IRA make distributions directly to a charitable organization on your behalf. Distributions paid directly to a charity are not taxable and count toward your required minimum distributions.
The benefit of charitable giving can be enhanced by donating appreciated stock rather than cash. Your charitable contribution deduction is based on the fair market value of the contributed stock and you won’t have to pay tax on the appreciation in the value of the stock.
One tool available to help you accelerate charitable contributions is a donor advised fund (DAF). A DAF is a fund established with a public charity where the donor irrevocably transfers money or appreciated stock to be used for charitable purposes.
The donor gets a charitable contribution deduction in the year money or stock is transferred to the DAF. Assets in a DAF can be invested at the discretion of the donor and grow tax free until the donor requests that the DAF transfer money to a specific public charity.
Strategy 4: Harvest tax losses
Consider selling investment assets that have gone down in value as a way to recognize losses for tax purposes. You should consult with an investment professional before buying or selling assets. Capital losses can offset capital gains and up to $3,000 of non-capital gain income each year.
Any capital losses that are not absorbed in the year of sale carry forward indefinitely. Wash sale rules prevent recognition of the loss where a “substantially identical” security is purchased within 30 days before or after the sale, so you will need to wait before reacquiring the same stock or bond. The wash sale rules do not prevent you from buying stock in another company in the same industry.
Strategy 5: Acquire capital assets
The tax reform proposal generally allows businesses to immediately expense the cost of new equipment and other capital assets acquired after September 27, 2017. Consider acquiring fixed assets before year end as a way to accelerate deductions.
Under current law, 50 percent bonus depreciation is available for new equipment placed in service by year end, so the strategy may provide a tax benefit even if tax reform is not enacted.
Strategy 6: Maximize retirement contributions
No year-end tax strategy conversation would be complete without talking about retirement saving options. You may want to consider increasing your retirement plan contributions as a way to obtain a tax deduction and set aside money for your future.
There are several types of retirement plans available to businesses. In some cases retirement plan contributions must be made by year end (e.g., a 401(k) plan) and in other cases the contributions can be made after year end (e.g., IRA contributions).
Strategy 7: Complete large purchases in 2017
If you live in a state that does not impose an income tax or you pay relatively low state income taxes, you may deduct your sales taxes in lieu of state income taxes. Tax reform is expected to limit the deduction for sales taxes, so if you are thinking about making a large purchase — like a personal car — it may make sense to complete the purchase before year end so you can deduct the sales tax associated with the purchase.
Sales taxes are not deductible for AMT purposes, so the strategy would not be beneficial if you are subject to AMT for 2017.
How we can help
Before implementing any of these strategies, consider your personal tax situation. For example, many taxpayers will be better off by accelerating deductions and deferring income, but some may benefit from deferring deductions and accelerating income. If you are subject to the alternative minimum tax, you may not see a tax benefit from some of the above strategies.
Our tax professionals can answer your questions regarding the tax reform proposal and devise a personalized year-end tax plan to help you take advantage of opportunities that tax reform presents.