With the tax reform bill now fully approved by Congress and the President set to sign it into law, we finally know what the new tax rules will be beginning in 2018. But what should individual taxpayers be doing before we get to the end of the year in order to take advantage of any expiring provisions of the current tax code?
While tax planning is complex, and no two taxpayers are in exactly the same position, the list below features items that can be broadly applied by many individuals to ensure they lower their tax bill this year.
- Once we get to January 1st, taxpayers will no longer get the benefit of miscellaneous itemized deductions. This includes deducting from income things like unreimbursed job costs, professional dues and subscriptions, investment management fees, and tax preparation fees. While the deduction for these items is limited to costs above 2% of Adjusted Gross Income (AGI), taxpayers with enough expenses to meet that threshold should look to pay as many of these costs before year-end as possible. Go ahead and book that work trip that you won’t be reimbursed for, pay your industry society dues, and register for the class you need to take for work before the end of the year. Make sure any outstanding tax prep fees, legal fees related to estate planning, and investment management fees are paid before January 1st. While these costs are an adjustment for Alternative Minimum Tax (AMT) purposes (and taxpayers being taxed under the AMT won’t receive any additional benefit), these expenses will certainly be worthless for tax purposes come 2018.
- Paying any outstanding property tax bills before the end of the year will also be beneficial to many taxpayers. Beginning in 2018, the deduction for all state and local taxes will be capped at a total of $10,000. The cap applies to the aggregate of property tax along with the deduction for state and local income or sales tax. Paying property tax before the new year will yield a better benefit for most taxpayers. Again, this is an AMT adjustment, which could limit or eliminate the benefit for some taxpayers, so it is best to discuss your specific circumstances with an advisor to know what is right for you.
- As mentioned above, the deduction of state income taxes will be limited to a cap of $10,000 in 2017. For many taxpayers, it makes sense to pay any upcoming 2017 state income taxes before year-end as well, even if the payment is not due until April of 2018. As with other itemized deductions, these state income taxes are an adjustment for AMT purposes, but some taxpayers subject to tax under AMT may still see a benefit from paying state taxes now. The state income tax deduction is also a deduction in the computation of Net Investment Income Tax (NIIT), an additional tax created under the Affordable Care Act for high earners. The same deduction limitation that applies to regular tax in 2018 will also apply to NIIT. Payments made before year-end could have an additional 3.8% tax benefit.
- Charitable contributions made before year-end will likely create a better tax benefit than those made in 2018. With many of the tax brackets expanding and tax rates being reduced, taxpayers with similar amounts of income across the two years will likely have a lower overall tax rate in 2018. That means a deduction against income next year will yield a lower tax savings than a deduction before year-end. Consider making additional charitable gifts before the end of the year instead of waiting until January. Additionally, a charitable contribution of appreciated stock provides the double tax benefit of a deduction of the full fair market value of the shares while also avoiding paying capital gains tax on the unrealized gains. This is solid tax reduction strategy that remains highly effective.
As mentioned earlier, no two taxpayers have the exact same tax scenario, and individual circumstances must be considered when employing these tax saving strategies. The application of the AMT rules could affect the benefit received. Strategies could change if a taxpayer’s level of income is highly inconsistent from year to year. It is also worth mentioning that the overall limitation on itemized deductions for high earners, often known as the PEASE adjustment, is also eliminated for 2018. This is the rule that excludes itemized deductions up to 80% of total deductions or 3% of a taxpayer’s total AGI (whichever is lower) for individuals earning above certain thresholds. If this limitation will impact your 2017 taxes and your expected deductions do not yet rise to certain levels, some deductions may be better saved for 2018 when such limitations are taken off the table.
One goal of tax reform that was not achieved, by the admission of many members of Congress, is the simplification of the tax code. In numerous instances, things have become more complex and discussing the changes with a professional is still the best bet for taxpayers. This article touches on only a few of the many possible tax-saving moves that could be made before the end of the year.
With any change comes opportunity, and this tax reform bill presents an abundance of opportunities for those who are creating effective strategies. LBMC Wealth Advisors is here to help design and implement those tax savings strategies.