As 2017 draws to a close, an uncertain tax and legislative environment means that year-end tax planning is more important than usual. The possibility of major tax reform opens up powerful planning opportunities that can save on taxes if completed before year’s end.
Here are nine of the most important 2017 tax planning considerations for individuals:
- Accelerate deductions and defer income. Deferring tax is usually a good strategy, but this year it’s even more important. You want to use deductions now while rates are higher and defer income into future years when rates might be lower. Consider deferring bonuses or other income if possible. On the deduction side, you may be able to accelerate state and local income taxes, interest payments and real estate taxes.
- Use itemized deductions before they’re gone. Tax reform threatens the availability of many itemized deductions. Consider paying expenses now while you can still use the deduction. You can often prepay 2017 state taxes even if they aren’t due until next year. Also, taxpayers can often control the timing of costly non-urgent medical procedures. But remember, some expenses can’t be deducted unless they exceed a certain percentage of your adjusted gross income.
- Leverage state and local sales tax deduction. If you are deducting state and local taxes, remember that you can elect to deduct state and local sales tax instead of state income taxes. This is valuable if you live in a state without income tax, but can also provide a bigger deduction in other states if you made big purchases subject to sales tax (like a car, boat, home, or all three). The IRS has a table allowing you to claim a standard sales tax deduction so you don’t have to save all of your receipts during the year, and you can add the tax from large purchases on top of the standard amount. If you plan on making this election for 2017, consider the benefits of making any planned large purchases before the end of the year.
- Consider charitable deductions now. Lawmakers have promised to retain charitable deductions as part of tax reform while also proposing to increase the standard deduction, meaning fewer taxpayers will itemize deductions in the future. If you don’t itemize deductions, you can’t deduct charitable gifts. Also, the deduction may be more valuable against today’s higher rates. Consider accelerating gifts into this year.
- Make up a tax shortfall with increased withholding. Don’t forget that taxes are due throughout the year. Check your withholding and estimated tax payments now while you have time to fix a problem. If you’re in danger of an underpayment penalty, try to make up the shortfall by increasing withholding on your salary or bonuses.
- Leverage retirement account tax savings. It’s not too late to increase contributions to a retirement account. Traditional retirement accounts like a 401(k) or individual retirement accounts still offer some of the best tax savings. Contributions reduce taxable income at the time that you make them, and you don’t pay taxes until you take the money out at retirement. The 2017 contribution limits are $18,000 for a 401(k) and $5,500 for an IRA with catch-up contributions allowed for those 50 years of age and older.
- Document your business activities. The 3.8 percent Medicare tax on your business income does not apply if you participate enough in your business that you are not considered a “passive investor.” Participation is defined as any work performed in a business as an owner, manager or employee as long as it is not an investor activity. You must document your activities. Make sure you document the hours you’re spending with calendar and appointment books, emails and narrative summaries.
- Take a closer look at your state residency status. For individuals who split their time between two different states throughout the year, this is an excellent time to reconsider where you may be taxed as a resident for 2017. To make it more likely that the high-tax jurisdiction will respect the move and not continue to tax you as a resident, you should track the number of days you are spending in each jurisdiction. If you move to a new state but you maintain significant contacts within the old state (including driver’s license, residences, bank accounts and the like), you could run the risk of being taxed as a resident in the old state.
- Tread carefully with estate planning. The possibility of estate-tax repeal makes planning a little more complicated this year, but it still makes sense to use your gift exclusion amounts because there is no tax cost to using the exclusion. Consider taking advantage of your annual $14,000 gift exclusion by making gifts before the year ends.