Another year is coming to an end, and April 16, 2018 will be here before you know it. This is not a typo, we get an extra day to file our 2017 tax return. The IRS has announced certain changes for 2017, but due to the possibility of tax reform, it is impossible to know whether or not these changes will take effect. While it is difficult to plan under these circumstances, it may be wise to assume that the IRS’s changes will survive and plan accordingly. If the changes do not take effect, then adjustments should be made as needed.
1. Defer/Accelerate Income
The general rule has been to defer income to 2018 if you anticipate being in a lower tax bracket next year. If you will be in a higher bracket in 2018, then the goal is to accelerate income payments into 2017 as you would be in a lower bracket.
Currently there are seven tax brackets. The IRS has announced that for 2018 the income thresholds for each bracket will be slightly higher than they were in 2017.
The difficulty with planning is that although the proposed tax plan calls for only three tax brackets, and possibly four, no one has any idea where the income cutoffs will be. Thus, it is difficult to determine whether you should defer or accelerate income as it is not known what tax bracket will apply to you.
2. Take/Defer Deductions
The general rule has been to determine if you will be able to itemize deductions or not. If you are on the borderline between itemizing and claiming the standard deduction, then your goal is to time deductions so that you cause a bunching of your deductions. This strategy enables you to have one year with a lot of deductions which you can itemize and a year with few deductions in which you cannot. You can create this bunching by accelerating deductions. For example, make year-end charitable contributions, make large purchases which will generate a sales tax in 2017 or pre-pay property tax bills if you can.
The IRS has announced the standard deduction for 2018, and it is slightly higher t
han it was in 2017. It has also increased the personal exemption.
The proposed tax plan does increase the standard deduction to $24,000 for married couples and $12,000 for single taxpayers. What is not generally known, however, is that with this standard deduction there will no longer be a personal exemption deduction. It is unknown whether families with children
would get an additional deduction. In addition, in past tax plan proposals the head of household status was eliminated.
There has also been talk of eliminating mortgage interest, local income tax, sales tax and property tax deductions. All the uncertainty makes it difficult to chart a course of action.
3. Alternative Minimum Tax
In figuring out your deduction strategy, keep in mind that certain deductions and credits will trigger the alternative minimum tax. Therefore, do not accelerate deductions and credits if doing so will result in the imposition of the alternative minimum tax.
The IRS has announced that the AMT exemption will be higher in 2018 than it was in 2017.
The proposed tax plans does away with the AMT.
4. Harvest your Losses
If you have realized capital gains during the year and are planning to sell stocks and mutual funds, determine whether any of these sales will generate losses. If so, sell off the investment in 2017 so that you can offset the capital gains with the capital losses. If you have more losses than gains you can offset $3,000 of other income with the losses. Any additional losses can be carried over to next year.
5. Maximize contributions to retirement plans
If you participate in your employer’s 401(k) plan, contribute the maximum allowed. In 2017 the amount which may be contributed is $18,000; $24,000 if you are over 50. There are several benefits to making contributions to a 401(k) plan. First, the contributions are not wages and will not be subject to income tax, although they will be subject to social security and medicare tax. Second, you will be taxed on the 401(k) only when you begin to receive distributions. Third, your employer will usually match a percentage of your contribution.
Additionally, even if you have an employer sponsored retirement plan you may still be able to contribute to an IRA and, if you qualify, take a deduction for the contribution. The amount which can be deducted depends on your marital status and the amount of your adjusted gross income. Contributions to an IRA can be made until April 15, 2018. You can contribute up to $5,500 to an IRA or $6,500 if you are over 50.
A self-employed individual can also contribute to a retirement plan, for example a Keogh or SEP, so long as the plan is established by December 31.
The deduction for retirement contributions are anticipated to remain the same under the proposed tax plan.
These are just some basic suggestions. There may be many more depending on your particular circumstances. Due to the complexity of the tax laws, and the current uncertainty, it is in your best interest to explore what would apply to you. Feel free to contact me with any questions you may have.