Most tax experts believe that Congress will pass, and President Trump sign, a massive tax reform bill before the end of the year. Here are some year-end tax tips you may want to consider in light of tax reform.
Important Note About Tax Reform
There’s still a lot we don’t know and a chance that tax reform may not pass at all. There are also differences between the House and Senate bills. These tips are based on what the early drafts have in common.
There will be some momentous changes to the tax code. But, these won’t take effect until 2018 or 2019. So, there is still time to take advantage of deduction that may or may not be around in future years. Here are some steps to take before the end of 2017 to minimize your taxes for 2017 and 2018.
#1: 2017 Is The Time to Take Personal Itemized Deductions
Both the House and Senate tax bills roughly double the standard deduction. This reduces all individual taxpayer taxable income by a fixed amount. Yet, both plans eliminate most personal itemized deductions, including:
- The deduction for unreimbursed employee expenses, such as mileage
- State and local taxes
- Tax preparation expenses
- Alimony payments
- Moving expenses to move to a new job
- Personal casualty losses (except for losses associated with special disaster relief legislation).
The House plan also eliminates the deduction for medical expenses. The Senate plan retains this deduction for 2018 and 2019.
If you’re able to itemize in 2017, you should take as many of the itemized deductions slated to disappear as you can.
#2: Take These Deductions While You Still Can (If You’re Eligible)
State and local income taxes
: The House and Senate plans both eliminate the deduction for state and local income taxes. You should prepay as much of these taxes as you can this year. Don’t wait until 2018.
Mail your estimated tax payment for state and local taxes due in January 2018 by the end of 2017. This allows you to deduct the payment in 2017.
Yet, if you could be subject to the Alternative Minimum Tax (AMT) talk to your tax advisor before doing this. The high state and local tax deductions could trigger the AMT in 2017 and eliminate much of the benefit.
Both the House and Senate plans place a $10,000 cap on the deductions for property taxes. Thus, if you’ll owe more than this amount, prepay your 2018 property taxes on your home, if you can.
Under the House plan, homeowners would be allowed to deduct the interest on only up to $500,000 in home loan debt. The Senate plan does not contain this limitation. Pay your January 2018 mortgage payment before the end of 2017. This way, you can deduct the interest portion in 2017.
The House and Senate plans retain the itemized deduction for charitable contributions. Yet, far fewer taxpayers will be able to take this deduction in 2018 and later because of the planned increase in the standard deduction.
It will also result in less tax savings because tax rates will be lower in 2018 and later. Thus, 2017 is the time to maximize your charitable contributions. You must charge or mail in your checks by December 31, 2017 to deduct your contributions on your 2017 taxes.
The House plan eliminates this deduction while the Senate retains it. It’s unclear what will happen with the final bill. If your 2017 medical expenses are close to 10 percent of your adjusted gross income, consider getting any elective medical or dental procedures.
Generally, you can’t prepay 2018 medical expenses in 2017 and take a 2017 deduction. Yet, there can be an exception for prepayment of entrance fees to aretirement home.
The House and Senate plans both eliminate this deduction. So, if you’re thinking about relocating for a job, try to do so before the end of 2017.
#3: Pay Unreimbursed Employee Expenses in 2017
Under current law, employees who incur out-of-pocket expenses to perform their jobs may claim a deduction to the extent such expenses are not reimbursed by the employer. Such expenses are an itemized personal deduction and are deductible only if, and to the extent, the exceed 2 percent of the employee’s AGI.
Common employee expenses include job-related mileage (not including personal commuting), long-distance travel expenses, uniforms and work clothes and more. Both the House and Senate plans eliminate the deduction for unreimbursed employee expenses.
Thus, you should pay any such expenses during 2017, don’t wait until 2018. For example, you may prepay your 2018 union dues in 2017 and deduct the amount on your 2017 taxes. You could also purchase a home computer you use for your job and deduct the expense.
#4: Defer Income to 2018
Both the House and Senate plans reduce tax rates on individuals and businesses. Under the House plan, individuals who own pass-through businesses will see their top tax rate decline to 25 percent. The Senate plan is not quite as generous, but still results in lower rates for pass-through ownerns.
Since tax rates will likely be lower next year, you should defer as much income as possible to 2018. Refrain from billing clients until 2018, and don’t press clients you’ve already billed for payment until next year. Have your year-end bonus postponed until 2018.
#5: Sell Losing Stocks
The Senate bill contains a provision that could make it harder to benefit from loses on stocks in 2018 and later. If you have losing stocks, sell them before the end of 2017.
Losses on stocks are capital losses than can offset your annual capital gains plus up to $3,000 of other income. Any excess losses can be carried forward indefinitely to help offset future capital gains.
#6: Buy a Plug-In Vehcile
The House bill eliminates the tax credit of up to $7,500 for plug-in vehicles like the Tesla or Chevy Volt. If you want to be certain to get this credit, buy your plug-in before 2018.
#7: Finalize Your Divorce or Separation Agreement
If you’re getting divorced or separated and will pay your ex-spouse alimony, you should finalize your divorce or separation agreement by the end of 2017. This way, you can deduct your alimony payments. Under the House plan, alimony payments will not be deductible for divorces or separations entered into during 2018 and later.
MileIQ’s blog does not constitute professional tax advice. You should contact your own tax professional to discuss your situation.