I want to use the next few weeks to get some preliminary tax planning done. However, with tax reform working its way through the federal legislature, I’m unsure of what to do. What should I be thinking about?
The end of the year is right around the corner and there are several tax saving tips to keep in mind as 2017 winds down. However, this year we have some added uncertainty about the future as we wait to see if tax reform proposals will pass into law. These are the strategies we are giving our clients at this critical moment.
Tip #1: Postpone income and accelerate deductions
Be aware of your tax bracket. Currently, the top tax rate is 39.6% on taxable income of more than $418,401 for single taxpayers; $470,701 for married couples filing joint returns ($235,351 if filing separately); and $444,551 for head-of-household taxpayers. If your remaining pay will push you into the top tax bracket, defer receiving money wherever you can, as the rates may change. For example, ask your boss to hold your bonus until January; put more money into your tax-deferred retirement plan; or hold off on selling assets that will produce a capital gain. If you’re self-employed, postpone sending invoices for year-end jobs until January 2018. On the other hand, consider paying your mortgage and state income taxes due in January by December 31 to maximize your 2017 deductions. (Additionally, the state and local tax deduction is potentially on the chopping block.) However, if you are subject to the alternative minimum tax (AMT) in 2017 there is not a benefit for paying state and local taxes early.
Tip #2: Consider your retirement funds
Put as much money as you can into your 401(k) or similar workplace retirement savings plan. Traditionally, plan contributions are made before taxes are taken out, so you’ll have less income that the IRS can touch. The maximum amount employees can put into a 401(k) plan this year is $18,000, but any amount you contribute will help. If you are age 50 or older, you can put in an extra $6,000. Check to see if you can increase your 401(k) contributions. The end of the year is a wonderful time to make adjustments. If you are 70 ½ or older, examine the most tax-efficient ways to take your required minimum distribution (RMD), especially if your tax rate is soon to be lowered. If you are older than 70 ½, you are required to take the RMD by December 31, but if you typically take more, it may make sense to push the additional distribution until 2018.
Tip #3: Use capital losses to offset capital gains
If you have assets that have lost value, use them to reduce your overall income. Capital losses can be used to offset capital gains. Review your portfolio, and if you have more losses than gains, you can use up to $3,000 to reduce your ordinary income amount. More than $3,000 can be carried forward to future tax years.
Capital gains and losses can become very complex especially for higher income taxpayers facing the 3.8% Net Investment Income Tax. In addition to calculating your modified adjusted gross income, you must consider the different types of investment earnings that are subject to the tax and how to appropriately calculate losses within each category. Consider consulting with a tax professional to determine the best plan of action for your specific situation.
Tip #5: Pay college costs early
The American Opportunity Tax Credit is still in effect for 2017. It’s worth up to $2,500 and as much as 40% of the credit may be refundable. That means you could get up to $1,000 back as a tax refund even if you don’t owe any taxes. Even if the spring semester bill isn’t due until January, it might be beneficial to pay it before the end of the year. Doing so will allow you to claim the credit on this year’s tax return.
Next week’s article will feature another set of tips to consider as you tax plan for the end of the year.
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.