We are almost to the end of 2017, and this year we may have some much bigger changes coming our way in 2018 than in a typical tax year. For that reason, you may want to pay close attention to this post.
The reason we have so many changes coming is that Trump’s Tax Reform is finally upon us. There are a lot of changes coming down the pipeline in 2018 and 2019, so you may want to take some proactive measures before the end of this year to maximize your savings.
Let’s start with the current state of the tax bill. Right now there are two versions of the bill that have been approved by Congress, one from the House and one from the Senate. Right now, these bills are going through a process called “reconciliation” to iron out any differences in the bills. Once the bills are reconciled, they will go back to their respective chambers for another vote, and, if they pass both houses of Congress, they will be sent to Trump to be signed into law.
As I write this, we don’t know whether there will be any changes at all, so you will need to monitor the situation carefully.
But assuming that we will see some form of tax reform, here are the most likely items that you will want to plan for.
Tax Moves You Should Consider Before the end of 2017
There are six major moves that you may want to consider, according to CNBC. Many of these strategies include putting off income or pre-paying deductions that could be going away or would otherwise become less valuable in future years. Here is my take on their recommendations.
1. Pre-Pay State and Local Taxes
One of the items in the crosshairs of this new tax bill is the State and Local Property Tax Deduction. The current proposal would make up to $10,000 of these taxes deductible.
If you have high property taxes where you live, you may want to consider pre-paying these taxes in 2017.
In addition, if you live in a state with high income taxes, such as North Carolina, you may want to pre-pay the balance due on your 2017 tax bill before the end of the year, rather than wait until April of 2018. That’s because there is talk that the state income tax deduction will go away completely next year.
2. Pay Down Home-Equity Loans
There is additional talk that the interest on home-equity loans may not be deductible next year. If you have a large balance on your HELOC, this is bad news for you. If it is possible for you to pay down the balance on that loan, you may want to consider doing that.
However, this is more of a consideration going forward than a strategy that I would use right now to plan for next year’s taxes.
In my opinion, your money is better spent pre-paying itemized deductions that may go away in 2018.
3. Delay Your Income
If you have the ability to control your income, including whether you will be paid commissions or bonuses in 2017 or 2018, you may want to delay your income until January.
This is because the tax rates will decrease across the board next year, so it would make sense to delay your income to take advantage of the lower tax rates.
4. Medical Expenses
The House and Senate bills would treat medical deductions differently. Currently, you can only deduct medical expenses to the extent that they exceed 10% of your income. Under the House proposal, this deduction would be eliminated. Under the Senate bill, the income threshold would be temporarily lowered to 7.5%.
Either way, with the increase in the standard deduction next year, all itemized expenses are at risk. The best course of action would be to pay as many of your health expenses this year as possible so that you can take full advantage of the medical deduction in 2017.
5. Charitable Donations
If you typically give to charity, it will make the most sense to give as much as you can in 2017. That’s because, again, the increase in the standard deduction will make this deduction less valuable next year because fewer people will find benefit in itemizing their deductions.
Final Thoughts on Tax Reform for 2017
If you own a business, there will be many changes coming down the road. Will the LLC still remain valuable, or should you switch to a corporation? What about electing S-Corporation status?
Many questions are still unanswered as we head towards the end of the year.
The bottom line is that because the standard deduction is likely to go up, the value of your itemized deductions will go down next year. As a result, we recommend pre-paying as many itemized deductions in 2017 as you can, while you have the chance.
Now, here is the post from the end of 2016. Many of these strategies are still applicable today.
This post was originally published on January 9, 2017 and has been edited to reflect current strategies.
Ok, so 2016 has come and gone. And even though there isn’t much you can do to reduce your income or accelerate your deductions from 2016, there are still things you can do to reduce your tax bill come April.
Here are just a few of last-minute tax tips that you should be thinking about to keep your tax bill down.
Contribute to your retirement accounts
The deadline to contribute to an Individual Retirement Account (IRA) or Roth IRA is April 17, 2017. If you are self-employed, then you may contribute to a SEP IRA, up through the date that you file your corporate tax return. If you receive an extension to file your corporate tax return, then you may wait until October 16, 2017, to make these contributions.
If you are looking to max out your IRA contribution, you must:
1) Not be eligible to participate in a company-sponsored retirement plan, or
2) If you are eligible for a company-sponsored plan, then your adjusted gross income must be less than $61,000 if you are single, or $98,000 for a married couple filing jointly.
If you do not qualify for an employer-sponsored plan, but your spouse does, then you may make a fully deductible contribution so long as your combined gross income does not exceed $184,000.
In 2016, the maximum amount you may contribute to your IRA is $5,500 ($6,500 if you are age 50 or older by the end of 2016).
If you are self-employed, a SEP IRA is a great way to reduce your income in a tax-deferred plan. For the 2016 tax year, you may contribute up to 25% of your W-2 income, or $53,000, whichever is less.
Contribute to a Health Savings Account (HSA)
If you have a high-deductible health plan (HDHP), then you may be able to take advantage of maxing out your HSA. The benefit to this is that, unlike an IRA, there is no income limit to fully deduct your contribution.
To qualify as an HDHP, your deductible must be a minimum of $1,300 for an individual plan, or $2,600 for a family plan.
You may contribute up to $3,350 for individual plans, or up to $6,750 if you have a family plan. If you are over age 55, you may contribute an additional $1,000.
You may make these contributions up until April 17, 2017, to take effect for the 2016 tax year.
Make a last-minute estimated tax payment
If you are looking at a big tax bill for 2016, and you failed to withhold enough in estimated tax payments, then you could owe significant underpayment interest and penalties.
This can happen in situations where you didn’t withhold an appropriate amount from your paychecks, or if you had a large realized gain from the sale of stock or real estate.
You will owe an underpayment penalty if you don’t pay at least 100% of your 2015 tax bill or 90% of your 2016 tax bill in estimated payments. If your adjusted gross income was $150,000 or more, then you must pay at least 110% of your 2015 tax bill to avoid an underpayment penalty.
To avoid these penalties, you can make an estimated payment by January 15th. This will only eliminate your penalty for the fourth quarter, so you may still owe an underpayment penalty for the first three-quarters of 2016. You can file Form 2210: Underpayment of Estimated Tax if your extra income occurred after August 31, 2016. This will annualize your extra tax liability and assist you in minimizing any potential penalties.
Start Organizing your tax records
If you haven’t already, now is a great time to start organizing your tax records. The better organized you are, the more you will save on your 2016 tax bill.
This month you will start to receive tax correspondence in the mail. Make sure you prepare a folder labeled “2016 Taxes” to keep all this paperwork organized. If you are the paperless type, you may want to scan all these documents into an online folder using a service such as Evernote.
Start looking through your checking and credit card statements, and make note of any tax-related expenses. Clearly, it is better to do this in real-time as you are reconciling your accounts, but managing this now will make things a lot easier for either you or your tax preparer as you get closer to tax day.
Final Thoughts on Minimizing Your Tax Bill
The bottom line when it comes to minimizing your tax bill is knowing which rules apply to your situation and making sure to make the deadlines. While we don’t do tax returns here at The Hart Law Firm, we have a number of tax professionals we can refer you to with any questions. If you don’t already have an accountant that you work with, give us a call at (919) 460-5422 and we would be happy to provide you with several referrals.