3 Year-End Tax Moves Due to the New Tax Law
You may want to act quickly on one or more of these
Now that Congress has passed its big tax bill, you may be wondering what you can do by December 31 to cut your 2017 tax bill. You’ll find a few timely tax-saving tips below.
Although you can still fund a 2017 Individual Retirement Account or Health Savings Account until next April, New Year’s Eve is traditionally your last chance to lock in most other types of tax savings.
This year, however, there’s a twist to that timing. “The tax legislation makes normal [year-end] planning even more important,” says Mark Luscombe, principal federal tax analyst for Wolters Kluwer Tax & Accounting.
The classic year-end advice is to accelerate next year’s deductions into the current year to get the tax breaks as soon as you can and to postpone receiving taxable income into the following year, to delay when taxes will be due on it. But “that’s an even better strategy with this tax bill,” since tax rates are poised to drop in 2018 and some tax deductions are going away, Luscombe notes.
These three moves could pay off, as long as you watch for potential pitfalls:
Year-End Move: Donate generously to charity.
Why Now? The ability to write off charitable gifts if you itemize deductions isn’t going away. But with the tax law nearly doubling the standard deduction in 2018 from $6,350 to $12,000 for singles and $12,700 to $24,000 for couples, the Tax Policy Center estimates are that fewer than 10 percent of filers will opt for itemizing, vs. about 30 percent who take that option now.
“The difference this year is that Dec. 31 may be the end of taking advantage of deductions,” says Brian Ashcraft, director of compliance of Liberty Tax Service.
Plus, even if you do keep itemizing, the new lower tax rates will make deductions less valuable next year. If your tax bracket falls from 28 percent to 24 percent, for example, the value of a $100 charitable deduction drops from $28 to $24.
So you have extra incentive to give what you can now.
“Bunch your 2017 and 2018 charitable deductions this year or use a donor-advised fund,” says Joe Bublé, a CPA at the New York City accounting firm Citrin Cooperman. With a donor-advised fund, you can deduct the full gift this year but parcel the money out to charities over time. Major brokerages and fund companies such as Fidelity, Vanguard, and Schwab offer donor-advised funds, with minimum initial investments ranging from $5,000 to $25,000.
One more charitable donation tip: Nearly nine years into this bull market, you may be sitting on large investment gains. By donating to charity some of your appreciated stocks or mutual funds this year avoid a capital gains bill on your profits and you can deduct the full market value.
Year-End Move: If your state and local income and property taxes tend to exceed $10,000, pay what you can before Dec. 31.
Why Now? The new tax law caps the deduction for state and local income, sales and property taxes at $10,000 starting in 2018 (and that’s a total of $10,000 for couples as well as for singles).
If you typically owe state income taxes on your tax return or plan to pay fourth-quarter estimated income taxes in January, you can write that check before the new year. Just be aware of the Internal Revenue Service advisory that prepaying in 2017 any 2018 property taxes that have not been assessed will not qualify for a 2017 deduction. (Pay too much for 2017, and you’ll get a refund when you file, which will be subject to federal taxes in 2018.) You can’t, however, prepay 2018 state income taxes in 2017.
With your 2018 property tax bill in hand, you can pay at least a portion in 2017. “The IRS standard is that if you know what you owe, you can prepay,” says Luscombe.
Potential Pitfall: You could find yourself falling under the dreaded alternative minimum tax (AMT) for 2017, the parallel tax system that excludes deductions for state and local taxes. Do a trial run of your 2017 tax return based on estimates of what you made and spent this year. “If you used software, play with last year’s return and see if increasing your property taxes triggers the AMT,” suggests Cari Weston, director of tax practice and ethics for the American Institute of Certified Public Accountants.
Year-End Move: Put more toward your home loan.
Why Now? The new tax law caps the mortgage interest deduction at $750,000 in total home debt on new mortgages take out after Dec. 15, 2017. That provision could prove costly to buyers of high-priced homes who could no longer write off interest on all their debt. The legislation will also end deductibility of home equity debt after 2017 — that is, mortgage money used for any purpose other than buying or substantially renovating a home.
Yet tax reform could make a difference for those with far more modest homes, too: For anyone who comes out ahead with the standard deduction in 2018, 2017 is the last call for claiming the mortgage interest deduction. To make the most of the perk while you can, you might send in your January 2018 mortgage payment in December or make an extra payment on a home equity loan.
Potential Pitfall: Check with your lender first, says St. Louis CPA Mike Piper, author of the Oblivious Investor blog. “An extra payment might go to paying down principal, not interest,” he notes.
Also, be conservative. “The IRS has issued no specific guidance on this, but has generally frowned on excessive pre-payments,” says Luscombe, adding that one-to-three-months' worth is a “comfortable range.”