Stephen Fletcher, CFP® shares last minute tax planning advice as it relates to the GOP tax reform.
The end of the year is always a busy time for financial advisors and clients, trying to make sure all planning items for the year are completed and that clients are well positioned for tax season right around the corner. This year, Congress has added to this crunch with their much-anticipated tax reform, making our lives even busier than usual. Happy Holidays!
The tax overhaul that is all but a formality at this point makes some changes that could very tangibly affect how you should plan for taxes in 2018. To fully explore all of the changes coming down from Congress would take the remainder of the time we have to plan, so here are a few key areas to focus on:
- Charitable Planning
- If you itemize on Schedule A, the new tax plan could significantly affect you. First, if you are married and itemize above $24,000 ($12,000 if single), you will still be able to itemize in 2018. If you fall below that mark and make charitable contributions, you should consider making some at the end of 2017 instead of during 2018. You will lose the deductibility of these contributions because the new standard deduction is doubling. Don’t know who you would want to give charitably to yet? No problem; consider creating a Donor Advised Fund, that will allow you to make a contribution this year and capture the deduction, but not distribute the funds to specific charities until some time in the future.
- If you are not able to make a charitable contribution before the end of the year, you can in future years bunch your deductions; with this strategy, you would make your charitable contributions in a prior year, and then forego any contributions the next year. For example, in 2018 double up on charity for 2019 as well to make it into the itemized deduction territory, then forego contributions in 2019 and double up again in 2020.
- Pre-pay all 2017 state and local taxes
- For 2018, there will be a cap of $10,000 on all state and local taxes. If you think you may owe some in April, it’s better to make those payments now, when state tax payments are not capped, especially if you live in a high-income tax state, such as California or New York.
- In order to maximize the deductibility of state tax payments, you should pay all 2017 estimated state tax payments in 2017 instead of waiting until the 4th quarter deadline of January 15th or making a payment with your tax return in April. Additionally, if you have received your property tax bill for 2018 you could pay any amount above the $10,000 limit early.
- Be aware that if you paid any AMT tax in 2016, the prepayment of these state and local taxes will most likely be of no benefit to you in 2017.
- Plan for the loss of Miscellaneous Deductions
- The deduction of tax preparation fees, unreimbursed employee expenses, investment advisory fees, and others are all being lost. For those who work with a financial advisor, this means that the fee is no longer deductible. However, a simple tweak, if available, to limit the sting of this lost deduction is to pay as much of your fee as possible out of a Traditional IRA account. The rules allow a proportional fee to be withdrawn from these tax-deferred accounts without penalty. If this is a strategy you can take advantage of, make sure your billing changes are in place by the beginning of 2018 so that none of your fee is paid in a way that doesn’t help you at least a little.
- If you have unreimbursed employee expenses, you should consider requesting reimbursement from your employer in 2017; otherwise, consider meeting with a tax professional to explore the possibility of shifting some of the miscellaneous deductions to other portions of your tax return where they would still be deductible, such as on a Schedule C for self-employed taxpayers, or on Schedule E for those with rental / S-Corporation income.
- Personal Exemptions are going away
- Currently, there is a $4,100 deduction for each taxpayer, spouse and dependent on a tax return. These credits are going away, but the Child Tax Credit is being expanded, from $1,000 to $2,000. That should offset the increase in taxable income for most, but if you do not have children and itemize your deductions on Schedule A, you will be doubly hit by this change. You will want to look for as many ways as possible to reduce your taxable income in 2018, or face a higher tax bill.
- Other considerations:
- Thinking about setting up a Home Equity Line of Credit (HELOC)? Make sure you take into consideration Congress’ removal of the tax deductibility of any interest paid on HELOC balances. They are also lowering the threshold of deductible mortgage interest from $1 million in 2017 to $750,000 in 2018, exempting current mortgage holders and those who squeeze in right before the deadline.
- The tax bill has, retroactive to January 1st of 2017, lowered the threshold to be able to deduct your unreimbursed medical costs on Schedule A to 7.5% from 10%. In 2019, it will increase again to 10%; should you have any large medical expenses, this year and next year are the best time to make those payments.
- If you are considering performing some Roth Conversions (moving funds from a Traditional IRA over to Roth in a lower income tax year to pay less in taxes on the withdrawals), be sure you are calculating the amount you’ll convert carefully; the conversion will be permanent, which is a removal of the rule allowing a Roth Conversion to be recharacterized.
The time we have left to take advantage of these disappearing deductions and tax changes is slim but some of these can make a large difference to your tax picture. Move quickly to position yourself well for 2018.