Tax Changes Are Most Likely Coming – So What Can Be Done This Year To Minimize Taxes Next Year?
Information updated 12-19-2017
The details of the Federal tax plan have been reconciled (herein referred to as the “reconciled tax bill”), so we know with a bit more certainty which tax changes are actually coming. The reconciled tax bill will shortly be put to Congress for a vote, but it is possible that it could be amended at any time before the President actually signs the bill. In anticipation of these changes, and in light of the fact that many itemized deductions will no longer be allowed, here is a list of items that are worth discussing with your tax and wealth advisors prior to the end of 2017.
A Prefatory Note: None of the tax changes discussed below have actually been enacted into law – nothing will be finalized until President Trump signs the tax bill into law. Further, all of the items described below contain varying levels of nuance. Before acting on any of these suggestions, be sure to consult your tax or investment advisor. In particular, if you are subject to the Alternative Minimum Tax, be especially careful before proceeding.
1. Prepay Your 2018 Property Taxes. If choose to prepay your 2018 property taxes, they must actually be paid to the taxing authority in 2017 and not simply put into escrow for payment at a later date. Not all municipalities allow a prepayment of property taxes, so if this is an option for you, be sure to consult with both your tax advisor and local municipality before proceeding.
Rationale: Many itemized deductions are going to either be eliminated or greatly reduced next year. Further, the standard deduction is probably going to increase up to $24,000 for couples filing jointly (up from $12,700), thus making the overall use of itemized deductions more challenging. Being able to claim your 2018 property taxes as a deduction in 2017 could result in significant tax savings.
2. Prepay Income Taxes Early. Sadly, the reconciled tax bill eliminates the ability to prepay income taxes. However, if you make quarterly income tax payments, the 4th quarter payment is not due until January 16, 2018. Because this payment is actually for the fourth quarter of 2017, making this estimated payment in 2017 is allowed.
NOTE: The reconciled tax bill will allow taxpayers to deduct a maximum of $10,000 as itemized deductions, which may include any combination of state and local taxes, including property and sales taxes.
3. Prepay Your January 2018 Monthly Mortgage Payment. The ability to prepay one month of the coming year has been a law for many years. The reconciled tax bill did not touch it. To wit, the government will allow the January 2018 payment to be applied to your 2017 itemized deductions. Unfortunately, prepayment is limited to one month, so it is not possible to pre-pay your entire yearly mortgage and claim it as a deduction in 2017. Be sure that your bank includes all 2017 payments on the 1098 Statement that they will provide.
4. No Need To Consider the Strategic Sale of Certain Equities. Good news – the Senate version of the Tax Bill required the oldest tax lots in any particular equity holding must be sold first. The reconciled tax bill has scrapped this provision. Thanks to its removal, there is no need to pick and choose which tax lots to sell prior to 2018.
5. No Need to Consider Selling Your Home. More good news – the reconciled tax bill keeps the current law in place which only requires that you have lived in your primary residence for 2 of the last 5 years in order to receive capital gains tax treatment on any profit from the sale of the house. There had been a proposal to increase that requirement to 5 of the previous 8 years in order to receive the benefit, but that proposal was rejected.
6. Do NOT Rush to Complete A Planned Home Purchase. Sadly, the reconciled tax bill limits interest paid on mortgage debt to be a deduction for houses up to $750,000 in cost. The current law allows the mortgage deductions for houses up to $1,000,000, but the reconciled tax bill states that going forward any houses purchased for up to $1,000,000 must have been purchased by December 15, 2017 in order to claim the full interest mortgage payment deduction.
7. No Need to Make Your 2018 Charitable Gifts in 2017. There was concern that the charitable gift deduction would be eliminated by the new tax bill, but the reconciled tax bill preserves the charitable giving deduction. So no need to front-load your charitable giving in 2017.
8. No Need To Prepay Your January 2018 Student Loan Interest. As with the charitable gift deduction, there had been a proposal to eliminate student loan interest as a deductible item, but that proposal did not make its way into the reconciled tax bill. However, as per the current law, you can still prepay your January, 2018 student interest in 2017 if that is a tax efficient move for your particular circumstances
9. Arrange To Have Your Income Deferred Until 2018 If Possible. While obviously not available to everyone, to those individuals who have the ability to defer their salary or income until next year, they should consider doing so.
Rationale: In the vast majority of situations, one’s personal Federal income tax will likely be reduced next year. Deferring the income until next year will allow you to take advantage of the lower income tax rates.
10. No Need to Pay off sizable medical expenses. Good news on the medical expense front. The current law allows you to deduct out of pocket medical expenses that exceed 10 percent of your Adjusted Gross Income. The reconciled law LOWERS this figure to 7.5 percent of your Adjusted Gross Income. This is a real value-add for taxpayers with lower incomes who need regular assistance and care. In light of this, it might actually make sense to hold off on making any sizable medical expense payments until 2018. Be sure to consult your tax professional.
11. Accelerate Other Expenses That Qualify As Itemized Deductions. The idea here is to incur these expenses in 2017 so as to maximize one’s itemized deductions. Examples of these expenses would include: unreimbursed business expenses, qualified educational expenses, expenses for uniforms, tax preparation fees, business use of your home, subscriptions to professional journals, and job-hunting expenses. There are many others; check with your tax expert for those that apply particularly to you.
Rationale: Yet again this is a tax play in order to maximize the number of itemized deductions that one can claim in 2017 due to the fact that many of these deductions will be eliminated or greatly reduced in 2018.
12. Good News For Teachers. There had been a proposal to eliminate the $250 deduction for classroom items that teachers pay for out of their own pockets. Fortunately, this has not been touched in the reconciled law.
13. Moving Expenses – Get A Move On. If you are about to relocate because of a change in jobs, consider making the move in 2017. The current law allows moving expenses to be deducted – even if the taxpayer does not itemize their tax returns – as long as the new workplace is at least 50 miles farther from the old home than the old job location was from the old home. Under the reconciled tax bill, moving costs will generally not be available starting in 2018.
Rationale: While this may be a difficult item to implement, it might be worth it to prepay any moving expenses that you know are coming even if you have not actually moved yet. Consult your tax professional if you are anticipating a work related move in the near future.
14. Prepay Your Tax Preparation. Tax preparation and similar tax-related expenses, like software to file electronically, will no longer be deductible.
Rationale: Your tax preparation fee could conceivably be a large number, so be sure to consult your tax professional to see if this is a tax efficient strategy for your particular situation.
This material is provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. Information is obtained from sources deemed reliable, but there is no representation or warranty as to its accuracy, completeness or reliability. All information is current as of the date of this material and is subject to change without notice. Any views or opinions expressed may not reflect those of the bank as a whole. FineMark National Bank & Trust services might not be available in all jurisdictions or to all client types.
