While it is hard to believe, we’re officially into the fourth quarter of the year, I know that it is time to start thinking about my 2017 tax return. I’m trying to get a jump on things, and I’m wondering what you recommend I focus on?
We applaud you for wanting to get ahead this fall! We highly recommend that everyone spends a little time before the holidays roll around to squeeze in specific tax reduction strategies that will save you money when you file your return next year. You may be able to make your new year even happier with a larger refund or reduced tax burden.
For 2017, and looking ahead to 2018, individuals and businesses need to be ready for late tax legislation and prepare for many new requirements and responsibilities that may come with tax reform being a priority for the current administration. We’ve outlined some tax planning ideas for individuals in particular that might be applicable.
Delaying income until 2018 and accelerating deductions this year is one of the best ways to lower your 2017 tax bill. This is especially true if tax reform causes tax rates to go down next year.
Pushing income into 2018 and accelerating deductions into 2017 can result in a permanent tax benefit if in fact rates are lowered.
You may be able to delay a year-end bonus if it is standard practice at your company, or if you are a freelance employee, you may be able to postpone billing. By doing so you may be able to claim larger deductions, credits and other tax breaks for 2017 that are phased out over varying levels of adjusted gross income (AGI). These can include child tax credits, higher education tax credits, and deductions for student loan interest. For some though, it might be better to accelerate income into 2017. If you are subject to alternative minimum tax this year, certain deductions, including taxes, are not deductible and therefore should not be accelerated. Reducing your adjusted gross income by postponing income will reduce alternative minimum tax (AMT). Again, these strategies are especially important if tax rates go down next year and AMT is eliminated.
Consider the Net Investment Income (NII) tax
The threshold amounts for the NII tax are $250,000 for joint, $125,000 for a married taxpayer filing separately, and $200,000 in any other case. It is important to monitor all of your net investment income to see if you are liable for the NII tax. NII includes more than just capital gains and dividends; it also includes income from a business in which you are a passive participant. Rental income might also be considered NII unless earned by a real estate professional. To minimize the potential liability, consider strategies that will reduce your income below the thresholds listed above.
Contribute maximums to retirement accounts
Tax-deferred retirement accounts are great investments. If you have a company-sponsored 401(K), try to increase your contributions so that you invest the maximum amount of money allowed. For 2017, that is $18,000, or $24,000 if you are over the age of 50. IRAs are also great options, and you have until April 15, 2018 to make your 2017 contributions. The maximum annual contribution to an IRA is $5,500, or $6,500 if you are 50 or older.
Take advantage of zero tax rate on capital gains
The maximum federal income tax rate on long-term capital gains for 2016 is 20%. If your taxable income (including the gain) falls within the 10% or 15% tax brackets, you don’t have to pay any tax on the capital gains. You should review your portfolio assets and determine whether you should act before the end of the year.
If you have incurred net capital gains this year, consider selling investments that would generate capital losses prior to December 31, 2017. This will allow you to reduce your overall tax bill.
Give the gift of appreciated stock
You can boost your charitable contributions by donating stock or mutual fund shares instead of cash. By doing so, you may be able to deduct the fair market value of your shares and permanently avoid income tax on the capital gain. In turn, the charity you contribute to will receive the full amount of your gift. You need to own the stock for more than a year to deduct the fair market value and you can only deduct up to 30% of your adjusted gross income.
Estate and gift taxes
These are currently very much in flux with the current proposed tax reform on the legislative agenda. It remains to be seen whether the estate tax will be eliminated. The maximum federal unified estate exclusion amount for 2017 is $5.49 million for gifts made and estates of decedents dying in 2017. In addition, you can give up to $14,000 in cash or other property completely tax-free to as many individuals as you want, and it doesn’t count towards the lifetime exclusion. If you’re married, you and your spouse can each gift $14,000, raising the annual maximum exclusion to $28,000.
These are just some of the year-end steps that you can take to minimize your overall tax liability. Be sure to take the time to meet with your financial advisors so you can act appropriately before ringing in 2018.
Tom Cooney and Crystal Faulkner are partners with MCM CPAs & Advisors, a CPA and advisory firm offering expert guidance and beyond the bottom line thinking for today’s public and private businesses large and small, not-for-profits, governmental entities and individuals. For additional information, call 513-768-6796 or visit us online at www.mcmcpa.com.