As the end of the year approaches, it is a good time to think of planning moves that will help lower your tax bill for this year and possibly the next. The Senate and the House have recently passed their version of the tax reform bill. We are now just waiting for results of the reconciled bills. The majority of the expected provisions will not take effect until 2018.
We have compiled a checklist of actions based on current tax rules and the potential changes in 2018 that may help you save tax dollars if you act before year-end. Not all actions will apply in your particular situation, but you, a family member or your business will likely benefit from many of them. We can narrow down the specific actions that you can take once we meet with you to tailor a particular plan. In the meantime, please review the following list of items to consider on an individual basis and contact us at your earliest convenience so that we can advise you on which tax-saving moves to make. (For businesses, please refer to the business items listed further down.)
Proposed New Tax Legislation:
- The proposed bill does not change any of the Net Investment Income Tax or the additional Medicare tax implemented by the Affordable Care Act (Obamacare). Higher income taxpayers will continue to be subject to these taxes.
- Both bills have proposed to dramatically change the expenses that qualify for itemized deductions and the amount of the standard deduction. If passed this may reduce the number of people that will itemize their deductions in the future. Individuals that fall into this category may want to consider paying charitable contributions and real estates taxes for 2018 in the 2017 year.
- Tax brackets in both bills are generally more favorable than current law.
- Taxes on C Corporations and pass-through entities would generally be lower under both bills than current law. You may want to consider ways to defer net income in those entities until 2018.
- Businesses contemplating large equipment purchases also should keep a close eye on the tax reform plan being considered by Congress. The current version contemplates immediate expensing – with no set dollar limit – of all depreciable asset (other than building investments made after Sept. 27, 2017, for a period of at least five years.
The bills have been reconciled, but we don't know all the provisions of the proposed law. We will have a very short window to react to the final provisions. You may want to consider making plans to address any of the proposed portions of the potential new law that may impact you. We can help you sort out your individual options.
Below are some strategies to reduce 2017 income taxes:
- Postpone income until 2018 and accelerate deductions into 2017 to lower your 2017 tax bill.
- It may be advantageous to try to arrange with your employer to defer, until early 2018, a bonus that may be coming your way.
- If you expect to owe state and local income taxes when you file your return next year, consider asking your employer to increase withholding of state and local taxes (or pay estimated tax payments of state and local taxes) before year-end to pull the deduction of those taxes into 2017.
- Estimate the effect of any year-end planning moves on the Alternative Minimum Tax (AMT) for 2017, keeping in mind that many tax breaks allowed for purposes of calculating regular taxes are disallowed for AMT purposes.
- You may be able to save taxes by applying a bunching strategy to pull "miscellaneous" itemized deductions, medical expenses and other itemized deductions into this year.
- Increase the amount you set aside for next year in your employer's health flexible spending account (FSA) if you set aside too little for this year.
- Increase the amount you set aside for next year in your employer's 401(k) plan, or 403(b) plan for nonprofit employees.
- If you become eligible in December of 2017 to make health savings account (HSA) contributions, you can make a full year's worth of deductible HSA contributions for 2017.
The following actions could possibly be used to save taxes by carefully structuring your capital gains and losses:
- Sell at a loss to offset earlier gains to make the best tax use of paper losses and actual losses from your stock market investments.
- Long-term capital losses offset long-term capital gains before they offset short- term capital gains. Similarly, short-term capital losses offset short-term capital gains before they offset long-term capital gains. Remember you may use up to $3,000 of total capital losses in excess of total capital gains as a deduction against ordinary income in computing your adjusting gross income (AGI).
- Sell the original holding and then buy the same securities at least 31 days later.
- Sell the original holding and buy similar securities in different companies in the same line of business.
- For mutual fund shares, sell the original holding and buy shares in another mutual fund that uses a similar investment strategy.
Business actions to consider:
- Businesses should consider making expenditures that qualify for the business property expensing option. Expensing is generally available for most depreciable property (other than buildings), off-the-shelf computer software, air conditioning and heating units, and qualified real property-qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property.
- Businesses should consider buying property that qualifies for the 50% bonus first year depreciation if bought and placed in service this year (the bonus percentage declines to 40% next year).
- To reduce 2017 taxable income, consider disposing of passive activity in 2017 if doing so will allow you to deduct suspended passive activity losses.
These are just some of the year-end steps that can be taken. Careful planning can save you substantial amounts of tax. If you would like to discuss any of these matters in greater detail, please give us a call at your earliest convenience so that we can help you realize maximum tax savings from these and other year-end planning strategies. Contact your Williams & Company representative with any questions.