Congress is getting closer to passing a major tax reform bill. Many American individuals and companies are being proactive, trying to find the adjustments that will a) position them for tax savings, and/or b) help them lessen (or avoid altogether) the effect of disappearing deductions. Of course nothing is final as of yet, so stay current on this story and wait until the bill is signed into law prior to acting on it. That caveat aside, here are some year-end moves that can accomplish both of those goals.
While we are not tax professionals ourselves and do not give advice on this subject, we would like to share recommendations we've received from our tax advisors at Morling & Company.
Take advantage of lower tax rates – One way to take advantage of lower tax rates next year would be to defer income into next year. There are several methods you could use:
- Ask your employer to delay payment of any forthcoming bonus until next year.
- Postpone converting a regular IRA to a Roth IRA until next year, in the hopes that income derived from the conversion will be taxed at lower rates.
- Hold off on billings until January.
- Postpone any debt reduction or cancellation so as to avoid accruing any debt cancellation income in 2017.
Prepare for changes to deductions – The likeliest scenario will see many deductions reduced or removed, and the standard deduction increased. You can be ready for various permutations of deduction changes by doing the following:
- If you anticipate owing state and local income taxes when you file your return next year, consider asking your employer to increase withholding on those taxes. That way, additional amounts of state and local taxes withheld before the end of the year will be deductible in 2017. You could also pay the last installment of estimated state and local taxes for 2017 by Dec. 31, or prepay real estate taxes on your home.
- In many cases under the new bill, charitable contributions may not yield a tax benefit. If you think you will fall in this category, consider pulling some giving planned for 2018 into December 2017.
- The itemized deduction for medical expenses may be cut. Consider accelerating "discretionary" medical expenses, such as new eyeglasses or dental work, into this year.
Additional strategies:
- If you hold any ISOs, it may be wise to hold off exercising them until next year as the AMT is likely to be repealed.
- If you’re selling your principal residence, check your tenure. The tax-free protection of up to $250,000 ($500,000 for joint filers) in profit currently applies if the residence was your main home for at least 2 of the past 5 years, but the requirement for this protection is likely to change to 5 of the past 8 years.
- If you’re scheduled for a work-related move, try to incur your deductible moving expenses before the end of the year, as the deduction for moving expenses is likely to be repealed.
These are only some of the preparations you can make, and it is still possible that no tax reform legislation will be passed this year. However, staying on top of the issue and keeping these tips in mind will have you in the best position to strike quickly and make changes to the tax code work for you.
