Last Minute Year End Moves for the Tax Reform
December 22, 2017 by Wade, CPA, M.S.T.
The Congress has just passed the most extensive federal tax reform in 30 years, with less than two weeks until the new year. But there are a few things individuals should consider doing right now, in 2017, to take advantage of the tax laws already in place and take advantage of the new laws coming in 2018. We look at two main areas of change — deductions and the new lower tax rates — and offer a few ways you can maximize your money.
Prepare for a Larger Standard Deduction
Beginning in 2018, the Tax Cuts and Jobs Act suspends or reduces many popular deductions in exchange for a larger standard deduction. For tax years beginning after December 31, 2017 and before January 1, 2026, the standard deduction is increased to $24,000 for married individuals filing a joint return, $18,000 for head-of household filers, and $12,000 for all other taxpayers, adjusted for inflation in tax years beginning after 2018. No changes are made to the current-law additional standard deduction for the elderly and blind.
The maximum itemized deduction related to taxes paid at the state and local tax level, including income and property taxes, will be limited to $10,000. Many itemized deductions will be eliminated altogether. Here are a few things you should consider doing now.
- Make all charitable gifts before January 1st. The itemized deduction for charitable contributions remain in place. But, as many other itemized deductions will be eliminated, charitable contributions after 2017 may not yield a tax benefit for many because they won’t be able to itemize. If you think you fall into this category, consider accelerating your giving into 2017.
- Pay your state or local taxes 4th quarter estimated income tax payments before January 1st. The maximum itemized deduction related to state and local taxes (income and property) will be limited beginning next year, you may not receive a tax benefit if you wait until January to mail in your payments.
- Do not prepay your 2018 state income tax in 2017; it will not be deductible. There is no benefit to “prepaying” your 2018 income tax.
- Prepay your property taxes due in 2018 before January 1st. To avoid losing the benefit of state and local taxes (income and property) due to the $10,000 limitation, don’t wait until 2018 to pay your winter taxes.
- Squeeze in expensive dental work and buy new glasses/contact lenses. For 2017 and 2018, medical expenses can be claimed as itemized deductions to the extent they exceed a floor of 7.5% of your adjusted gross income (AGI). Before the new law, the floor was 10% of AGI, except for 2017 it was 7.5% of AGI for age 65 or older taxpayers. If you won’t be able to itemize after this year, but will be able to do so this year, consider accelerating “discretionary’ medical expenses.
- As an employer or employee, if you are expecting to pay or receive moving expenses, try to make the move in 2017. The new law suspends the deduction for moving expenses after 2017 (except for certain members of the Armed Forces).
Defer Income Until After December 31st
Lower tax rates are coming. The Tax Cuts and Jobs Act will reduce tax rates for many taxpayers, effective for the 2018 tax year. To take advantage of lower tax rates next year, defer income into next year. Some possibilities include:
- For individuals, you may want to wait on converting IRAs to Roth IRAs until 2018 so that any income gained from the conversion will be taxed at the lower rate. If you already converted, consult your tax advisor about the option of making a trustee-to-trustee transfer back to the regular IRA before the end of 2017 (this mechanism will not be available in 2018).
- For business owners operating on a cash basis, put off billing clients until very late in 2017 or into 2018, so payment isn’t received until 2018 when the new lower tax rate kicks in.
- For business owners operating on an accrual basis, try to push completion of work into 2018, and change merchandise delivery dates until after December 31 (decide whether your customers will be happy or not about this first).
- Anyone working on debt resolution (which generally means the debtor receives taxable income- debt income cancellation), should postpone finalizing the deal until 2018.
In addition to these tips, here are a few 2018 tax facts to remember when you prepare to do your taxes:
- Like-kind exchanges to avoid taxes on asset appreciation will only be allowed on real estate not held primarily for sale.
- The alternative minimum tax exemption will be increased.
- The estate tax exemption amount will be doubled.
- The deduction for teacher’s school supply purchases remains the same — up to $250.
- Profits from home sales up to $250,000 for single filers and $500,000 for couples can still be excluded from capital gains taxes (stipulations will apply).
- Tuition waivers for graduate school students will not be subject to income taxes.
- Alimony paid for separation or divorces signed after December 31, 2018 will no longer be deductible.
Considering the magnitude of these federal tax law changes, it is important that you discuss your financial situation with your tax advisor. Gordon Advisors is prepared to assist and advise you on the best moves for you, your family, and your business. Contact us today!