As December 31 approaches, we’re getting a lot of questions about year-end tax strategies as well as the tax reform that’s winding its way through Congress. As of this writing, the House has passed a bill, but the Senate has not. There’s a lot of speculation about what will happen in 2018 and beyond. Here’s what is most important at this point in time.
2017 Tax Planning
As the year winds down, review your tax situation and ensure you’re capitalizing on the rules that enable you to retain more of your earnings.
- Tax-deferred accounts – In 2017, the 401(k) limit for folks under age 50 is $18,000; it’s $24,000 for those aged 50 or older. Check your pay stubs to make sure you’re on track to take full advantage of this deduction.
- Penalties – Do you expect to owe more taxes to the IRS or your state at tax time this year? If so, doing a detailed tax calculation could potentially help identify that amount and allow you to pay those extra taxes by 1/15/2018. This will help you avoid penalties and interest if your “bill” exceeds $1,000 to the IRS. If you live in a coastal state that was impacted by a hurricane (like Georgia), you can make a tax payment all the way up to 1/15/2018 and that payment will count as if you made it in September 2017, hence further minimizing those pesky penalties.
- Deductions – This year in particular, we highly recommend making your fourth quarter state tax payment in December. Tax reform may eliminate deductions for state and local taxes next year, so there’s no harm in taking them in 2017.
- Charitable giving – Remember to make your contributions by December 31, especially since the new tax rules may make charitable contributions less valuable in future years. (If you’re in a high tax bracket now and we see reduced tax brackets next year, this applies to you.) In addition, the standard deduction could rise in the future, making charitable deductions a non-event. You also should be aware that there are ways to “super gift,” meaning you can take large charitable deductions in the current year, but distribute the money over many years.
- Required minimum distribution (RMD) – If you reached 70.5 years of age in 2017, you’re required to take money out of your IRA. Failure to do so can result in a penalty equal to 50% of the required amount.
- Back-door Roth – This is a way to make contributions to a Roth IRA even if you’re over the income limits. Talk to your advisor or CPA if this makes sense for you. The allowance may not be available next year, so be sure to make the contribution and conversion by December 31.
- State tax credits – There are credits you can purchase to save on state tax liability. Talk with your CPA or us about how they could work for you.
- Flexible spending account (FSA) – Be sure to use the funds in your FSA; they typically don’t roll over to the following year.
2018 Tax Reform and Some Senate and House Bill Highlights
As of today, the House has passed a tax reform bill. Even if the Senate passes one of its own, both branches will need to hammer out their differences. It will be harder to get a bill through the Senate because of its rules and the small majority held by Republicans.
In general, the idea behind tax reform is to simplify the tax code, reduce tax liabilities, and offer a corporate tax cut. Here are some of the possible changes:
- A reduction of tax brackets from seven down to four.
- An increase in the standard deduction to $30,000. By doing so, it essentially will make tracking charitable giving and other deductions a thing of the past for most Americans. The majority will simply take the standard deduction.
- Elimination of personal exemptions. Right now, you get a per-person deduction for each individual in your household; that will disappear.
- Elimination of deductions for state and local taxes. Current deductions, such as state income taxes and ad velorem taxes, will no longer be deductible.
- Property taxes will be deductible, but only on the first $10K. (Right now, they are fully deductible.)
- Mortgage interest deductions could be capped on the interest of the first $500k of your mortgage.
- Medical deductions, in essence, will disappear.
- Some small businesses will get a lower tax rate on business profit. This primarily applies to capital-intensive industries (e.g., telecommunications, automobile); service industries (e.g., law, finance, healthcare, IT) won’t be included in that rate reduction.
- Additional child credits may come to life to help middle class families.
- Doubling of the estate tax exemption and eventual repeal of estate tax.
Again, there isn’t signed legislation yet, but as soon as there is, we’ll explain how it could impact you. We may recommend some last-minute changes to your 2017 tax planning once we know what the future tax structure looks like.
As always, thank you for your business, your trust and your loyalty. We’re always here to assist you in reaching your long-term financial goals.