If you are a small business owner or a higher wealth individual, I strongly recommend that you stay in touch with your tax advisor over the next few weeks to properly balance your 2017 and 2018 tax bills.
If you are someone who owns a home and is able to itemize, there are a few things you can do before year end to minimize your federal income tax bill in 2017. Unfortunately, most of these ideas however, require cash.
2017 Planning ideas
- The plans vary but you may lose the ability to deduct state, local, sales tax and property taxes in 2018. If your taxing authority will allow it, pay your 2018 property tax bill in 2017. If you don’t lose it, the deduction may still not benefit you in 2018 due to the higher standard deduction. The proposed standard deduction for 2018 is $12,000 for single filers and $24,000 for joint filers.
- If you are planning a significant purchase subject to sales tax, and you deduct sales tax rather than state income tax, consider making the purchase and incurring the sales tax in 2017 to secure the deduction.
- If you have a large medical expense that isn’t able to be paid from an HSA, consider having the procedure done and paid for in 2017. To deduct medical expenses your annual expense must exceed 10% of your Adjusted Gross Income (AGI). That can be a high hurdle.
- If you have higher state and local income tax bills, consider making your fourth quarter estimated payment in December, some of these are due in January so you can lock in the deduction in 2017, which you may lose in 2018. A state income tax overpayment in 2017 can be applied to 2018’s liability, deducted in 2017 and, if refunded, it will be taxed at the proposed lower rates.
- If your mortgage interest expense exceeds $10,000, consider paying an extra mortgage payment in December and incurring the cash interest expense in 2017. Not only will you lock in the deduction but it may allow you to slip under the cap in 2018. Going forward mortgage interest will continue to be deductible, subject to the cap. Consider 13 payments in a year you itemize and 11 payments the next year using the standard deduction.
- The timing of charitable deductions may also be important. While charitable giving is not on the chopping block, the higher standard deduction may allow you an opportunity to give more heavily every other year and utilize the standard deduction in the off year.
- Consider opening a community foundation account which can be used to house donor-directed charitable funds. These accounts are also great vehicles for selling stock that has appreciated. You donate the appreciated stock and get a charitable tax deduction for the fair market value of the stock or bonds. The funds are in an account that you use to direct contributions. Note: community foundations will require proof that the recipient is a qualified charity.
- Max out your 401(k) and IRA deductions in 2017. If rates fall you will have permanently avoided the difference in the income tax.
Don’t wait, PLAN NOW. Your ability to manage your tax exposure is greatly diminishes on January 1; meet with your tax advisor and have them model your situation so that your tax burden can be minimized.