The Death of Tax Deductions? Actions to Consider Before Year End

12.07.2017 - Craig Richards, CPA/PFS, CFP

Tax reform took another step forward last Saturday as the Senate narrowly approved a tax plan less than a month after the House passed a tax bill of its own.

It appears that both plans offer a mixed bag of potential pros and cons for taxpayers (see chart below). While tax reform is still in motion, we have been analyzing both the Senate and House versions carefully, running a variety of hypothetical scenarios to get a general sense of the implications tax reform might have for our clients.

While tax rates may be lower for many taxpayers, the numbers may be disconcerting for taxpayers who rely heavily on itemized deductions and exemptions. Their tax bills may increase in 2018 and beyond.

Actions to Consider Before Year End

In preparation for the potential changes ahead, it might be wise to consider taking full advantage of the deductions that are still allowed in 2017, but appear likely to be eliminated in 2018. It may also make sense to take deductions now, even those that will still be allowed in 2018, if they will fall below the new higher standard deduction threshold.

Give More to Charity in 2017
The Senate and House are both proposing a much higher standard deduction for both individuals and married couples in 2018 and beyond. Your charitable contributions may not provide you with an additional tax break after this year if your total available itemized deductions fall below this threshold. You’ll still be allowed to take itemized deductions for charitable contributions in 2018, but unless those contributions combined with other allowed deductions exceed the standard deduction amounts, itemizing won’t reduce your tax bill.

You should therefore consider making a larger gift this year versus spreading smaller gifts over the next several years. For example, if you usually make relatively modest charitable contributions every year, let’s say $5,000, consider lumping together a few years’ worth of donations before year end. This way the tax benefit is not lost, since your total itemized deductions may not exceed the new higher standard deduction threshold in future years.

Pay 2018 Property Taxes This Year
It might also make sense to pay your real estate taxes before the end of the year, even if they are not due until 2018. This way you can still claim them as deductions on your 2017 federal tax return.

Both the House and Senate tax plans cap property tax deductions for primary residences at $10,000 in 2018 and beyond. If your annual property tax bill is more than $10,000, or if your total deductions will not exceed the new threshold, you should consider paying your bill now. However, it’s important to note that this approach may not generate tax savings if you are subject to the alternative minimum tax (AMT).

Pre-Pay Your State Income Taxes
Similarly, if you need to pay a fourth quarter 2017 state estimated tax payment in January, consider making an estimated payment a few weeks earlier than usual, before the end of this year. While deductions for state and local income taxes are allowed in 2017, they would be eliminated in 2018 under both the House and Senate tax proposals. The IRS typically considers pre-payment of state income taxes acceptable, and allows them as itemized deductions on a federal tax return, as long as your estimates are reasonable and represent a “good faith” effort to meet your tax obligations. Again, beware of the AMT.

Postpone Income? Run the Numbers
Under normal circumstances, we typically suggest postponing income, such as bonuses, commission or other significant sources of income as a standard tax-planning technique. But this year, the potential advantages and disadvantages of postponing income are less clear.

The House tax plan would reduce the number of personal income tax brackets from seven to four, retaining the current top rate of 39.6% but eliminating the Alternative Minimum Tax (AMT). The Senate plan contains seven tax brackets, a top rate of 38.5% and a reduction in the number of taxpayers the AMT would apply to (due to an increased AMT exemption amount and less adjustment items).

With so many variables that come into play in 2017 and 2018, we strongly recommend running the numbers to determine whether or not postponing income is an appropriate strategy for you.

We Are Here to Help

If you have questions about tax reform and its potential impact on your financial situation, we can help you determine the most appropriate approach for your circumstances. Please feel free to contact us.

This communication is intended solely to provide general information. The information and opinions stated are as of December 7, 2017, and may change without notice. The information and opinions do not represent a complete analysis of every material fact regarding any market, industry, sector or security. Statements of fact have been obtained from sources deemed reliable, but no representation is made as to their completeness or accuracy. The opinions expressed are not intended as individual investment, tax or estate planning advice or as a recommendation of any particular security, strategy or investment product. Please consult your personal advisor to determine whether this information may be appropriate for you. This information is provided solely for insight into our general management philosophy and process.Historical performance does not guarantee future results and results may differ over future time periods.

IRS Circular 230 Notice: Pursuant to relevant U.S. Treasury regulations, we inform you that any tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. You should seek advice based on your particular circumstances from your tax advisor.


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