Wouldn’t you like to know about early year-end tax planning to take advantage of possible tax reform?
So, why do we think early tax planning is appropriate this year? Actually, with the prospect of major tax reform on the horizon, some strategies can be put into place before the end of the year that can substantially reduce your 2017 tax bill. That would be nice.
What is going on with GOP Tax Reform?
The framework that GOP tax reform is actually proposing is for future tax legislation. It is in the hands of Congressional Committees for them to work through the many details. However, the framework provides enough detail in regard to itemized deductions. They also have enough to formulate a strategy for 2017 on the basis that (1) tax reform actually gets in and (2) the changes be in effective in 2018.
Itemizing Deductions Under the Current Tax Law
Itemizing deductions under current law includes 5 major categories: Medical, Taxes, Interest, Charitable Gifts and miscellaneous Deductions. The GOP plan will only allow home mortgage interest and charitable deductions. If that is the case, then taxpayers who itemize in 2017 should take the following actions before year end to maximize their 2017 deductions:
Pay all outstanding medical bills. Keep in mind that the total amount of non-reimburseable medical expenses is only deductible to the extent that it exceeds 10% of your adjusted gross income (AGI). Some of these medical expenses can be prepaid.
Here is an example: You expect a dental bill, perhaps your child will receive orthodontic treatment for braces and you are on an installment payment plan. You can pay off the bill and increase your medical deductions for 2017, and the dentist might even give you a discount for paying early. With that said, if you can’t reach the 10% of AGI threshold, don’t make a special effort to pay any outstanding medical bills. We always say, better money in your pocket than someone else’s, unless there is a way to put MORE money in your pocket in the end.
2. Property Tax
Let’s say you have property taxes on your home, second home or vacant property. Perhaps you pay these in installments with an installment due in 2018. Pay that balance in 2017 to increase your tax deductions for this year.
3. State Income Tax
Okay, you reside in a state that has a state income tax, estimate your 2017 state tax liability and make sure your full liability is paid before the year’s end. What is another way to implement early year-end tax planning to take advantage of possible tax reform? Ask your employer to boost the amount of your state withholding by a reasonable amount. If you are self-employed, pay your 4th-quarter estimate that is due in January in December and increase your deduction.
4. Miscellaneous Deductions
This deduction category includes unreimbursed employee business expenses, investment expenses, certain legal fees, casualty losses, gambling losses and others. Generally, few of these expenses would support payments other than when they occur, and this category is only deductible to the extent that the deductions exceed 2% of your AGI.
Even though the strategy of prepaying tax-deductible expenses this year may yield tax savings, be thoughtful about borrowing money to execute this strategy. Interest on borrowed money can dampen the tax benefits.
5. Three Other Strategies
Here are a few more ideas how to implement early year-end tax planning to take advantage of possible tax reform.
Are you an investor? A popular year-end strategy is to review your stock portfolio and sell off losers to offset your gains.
Keep in mind: you are allowed to deduct a loss of up to $3,000 ($1,500 for married filing separate taxpayers) from the sale of investments. However, your investment strategies should take precedent over selling stocks to develop a loss.
Post-Secondary Education Tax Credits
Make the most of post-secondary education tax credits. Both the Lifetime Learning Credit and the American Opportunity Credit allow taxpayers who qualify to prepay tuition bills in 2017 for an academic period that begins by the end of March 2018. This means that if you are eligible to take the credit and you haven’t yet reached the 2017 maximum for qualified tuition. Also, any expenses paid that relate, you can bump up your credit by paying the tuition for early 2018 before the end of 2017. This strategy may not apply to you if you have been paying tuition expenses for the entire 2017 tax year. However, if your student just started college this fall, it will probably provide you with some additional help.
Small Business Entrepreneur
If you own a business and are considering purchasing equipment before the end of the year, take note that most equipment purchased by a small business can be expensed and will provide a substantial tax deduction. Keep in mind that just purchasing the equipment will not give you a tax deduction. You also must place the equipment in service before the end of the year, so you need to plan ahead and not wait until the last minute.
Do you need advice regarding year-end tax strategies?
Early year-end tax planning to take advantage of possible tax reform can save you a lot of money if you have the right strategy in place. If you would like to make an appointment to develop a year-end tax strategy, give Alex Franch, BS EA a call at 781.849.7200 or email us at firstname.lastname@example.org.
Alex Franch, BS EA
Mr. Franch is a Tax Specialist and Partner at Joseph Cahill & Associates / WorthTax. He has a diverse background including a Bachelor of Science from Boston College in Mathematics and extensive military service. Mr. Franch is an Enrolled Agent and has eight years of tax preparation experience. He has been serving individuals, families, and businesses for several years with tax and financial planning strategies and is a junior partner with the firm.
Mr. Franch is licensed by the Financial Industry Regulatory Authority (FINRA) with a Series 6, 63, 65, and 7, and by the Commonwealth of Massachusetts Division of Insurance.
Alex Franch is a registered representative of and offers securities and investment advisory services through Commonwealth Financial Network, A registered broker-dealer, Member FINRA/SIPC.