We hope you’re doing well and wish you a wonderful Holiday Season. As the end of the year approaches, it’s a great time to think of planning moves that will help lower your tax bill for this year and possibly the next. It will be interesting to see what happens with tax legislation in the coming weeks, but for now there are steps you may be able to take to reduce this year’s taxes.
Although this list is lengthy and may require your favorite holiday snack and/or coffee to get through, we have compiled a checklist of actions based on current tax rules that may help you save tax dollars if you act before year-end. Not all actions will apply in your particular situation, but you (or a family member) will likely benefit from many of them. We can narrow down the specific actions that you can take if you’d like to meet to tailor a particular plan. In the meantime, please review the following list and contact us if you’d like to discuss further which tax-saving moves to make:
Year-End Tax Planning Moves for Individuals
...If you aren’t already on track to maximize contributions to an employer’s 401(k) plan, consider increasing your contributions for the last paycheck(s) of the year. This can provide an additional tax-deferred deduction for 2017. The pre-tax and Roth 401(k) plan contribution limit for 2017 is $18,000. Employees age 50 and older can make an additional contribution of $6,000, for a total limit of $24,000 in 2017. Be sure to review your contribution rate for next year as well; for 2018 the 401(k) plan contribution limit increased by $500 to a maximum of $18,500, or $24,500 for employees age 50 and older.
...If you have a child (or a grandchild) who’s going to attend college in the future, consider making contributions to a qualified tuition program, also known as a “529 plan”. In Colorado, contributions to a Colorado CollegeInvest 529 Plan are generally deductible for state income tax purposes.
...If you believe a Roth IRA is better than a traditional IRA, consider converting traditional-IRA money invested in beaten-down stocks (or mutual funds) into a Roth IRA if eligible to do so. Keep in mind, however, that such a conversion will increase your AGI for 2017.
...If you converted assets in a traditional IRA to a Roth IRA earlier in the year and the assets in the Roth IRA account declined in value, you could wind up paying a higher tax than is necessary if you leave things as is. You can back out of the transaction by recharacterizing the conversion - that is, by transferring the converted amount (plus earnings, or minus losses) from the Roth IRA back to a traditional IRA via a trustee-to-trustee transfer. You can later reconvert to a Roth IRA.
...Increase the amount you set aside for next year in your employer's health flexible spending account (FSA) if you set aside too little for this year.
...If you become eligible in December of 2017 to make health savings account (HSA) contributions, note that you can make a full year's worth of deductible HSA contributions for 2017. In brief, if you qualify for an HSA, contributions to the account are deductible (within IRS-prescribed limits), earnings on the account are tax-deferred, and distributions are tax free if used for qualifying medical expenses.
...Consider making charitable donations before year end to take the deductions in 2017. If contributing used clothing or other household goods please remember to obtain a receipt from the charity and keep a list of the items donated and their estimated fair values for tax purposes. This is a requirement to be eligible for the noncash charitable deduction. A picture of the items donated may also be helpful in an audit situation. No charitable deduction is allowed for a cash contribution of less than $250 unless you have a bank record of the contribution or a written acknowledgement from the charity. For cash (or check) contributions of $250 or more you will need to obtain a written acknowledgement from the charity in order to claim the deduction.
...Consider donating appreciated stock to a charity before year-end. If stock has been held for more than a year, you generally will be able to claim a deduction for the fair market value of the stock and avoid paying any tax on the capital gain.
...If you are facing a penalty for underpayment of Federal or state estimated tax for 2017 consider having your employer increase your withholding for the remainder of the year. The withheld tax will be applied pro rata over the full 2017 tax year to reduce previous underpayments of estimated tax.
...If you expect to owe state and local income taxes when you file your return next year, consider paying the estimated taxes prior to year-end (or asking your employer to increase withholding of state and local taxes, as mentioned above) to pull the deduction of those taxes into 2017 if you won't be subject to alternative minimum tax (AMT) in 2017. Pulling state and local tax deductions into 2017 would be especially beneficial if Congress eliminates such deductions beginning next year.
...You may be able to save taxes by applying a bunching strategy to pull "miscellaneous" itemized deductions, medical expenses and other itemized deductions into this year. This strategy would be especially beneficial if Congress eliminates such deductions beginning in 2018.
...It may be advantageous to try to arrange with your employer to defer, until early 2018, a bonus that may be coming your way. This could cut as well as defer your tax if Congress reduces tax rates beginning in 2018.
...Consider paying deductible expenses before the end of the year. If you choose to use a credit card to pay an expense, doing so will increase your 2017 deductions even if you don't pay your credit card bill until after the end of the year. As a side note, we’d never recommend borrowing to fund a tax deduction, or making a purchase solely for the deduction. If you choose to put the purchases on a credit card, be sure to pay the balance in full when due to avoid carrying a balance and paying interest charges.
...Realize losses on stock while substantially preserving your investment position. There are several ways this can be done. For example, you can sell the original holding, then buy back the same securities at least 31 days later.
...You may want to settle an insurance or damage claim in order to maximize your casualty loss deduction this year.
...Take required minimum distributions (RMDs) from your IRA or 401(k) plan (or other employer-sponsored retirement plan). RMDs from IRAs must begin by April 1 of the year following the year you reach age 70-½. That start date also applies to company plans, but non-5% company owners who continue working may defer RMDs until April 1 following the year they retire. Failure to take a required withdrawal can result in a penalty of 50% of the amount of the RMD not withdrawn. Although RMDs must begin no later than April 1 following the year in which the IRA owner attains age 70-½, the first distribution calendar year is the year in which the IRA owner attains age 70-½. Thus, if you turn age 70-½ in 2017, you can delay the first required distribution to 2018, but if you do, you will have to take a double distribution in 2018-the amount required for 2017 plus the amount required for 2018. Think twice before delaying 2017 distributions to 2018, as bunching income into 2018 might push you into a higher tax bracket or have a detrimental impact on various income tax deductions that are reduced at higher income levels. However, it could be beneficial to take both distributions in 2018 if you will be in a substantially lower bracket that year.
...Make gifts sheltered by the annual gift tax exclusion before the end of the year and thereby save gift and estate taxes. The gift tax exclusion applies to gifts of up to $14,000 made in 2017 to each of an unlimited number of individuals. You can't carry over unused exclusions from one year to the next. Such transfers may save family income taxes where income-earning property is given to family members in lower income tax brackets who are not subject to the kiddie tax.
...Postpone income until 2018 and accelerate deductions into 2017 to lower your 2017 tax bill. This strategy may be especially valuable if Congress succeeds in lowering tax rates next year in exchange for slimmed-down deductions. Regardless of what happens in Congress, this strategy could enable you to claim larger deductions, credits, and other tax breaks for 2017 that are phased out over varying levels of adjusted gross income (AGI). These include child tax credits, higher education tax credits, and deductions for student loan interest. Postponing income also is desirable for those taxpayers who anticipate being in a lower tax bracket next year due to changed financial circumstances. Note, however, that in some cases, it may pay to actually accelerate income into 2017. For example, this may be the case where a person will have a more favorable filing status this year than next (e.g., head of household versus individual filing status).
...Higher-income earners must be wary of the 3.8% surtax on certain unearned income. The surtax is 3.8% of the lesser of: (1) net investment income (NII), or (2) the excess of modified adjusted gross income (MAGI) over a threshold amount ($250,000 for joint filers or surviving spouses, $125,000 for a married individual filing a separate return, and $200,000 in any other case). As year-end nears, a taxpayer's approach to minimizing or eliminating the 3.8% surtax will depend on his or her estimated MAGI and NII for the year. Some taxpayers should consider ways to minimize (e.g., through deferral) additional NII for the balance of the year, others should try to see if they can reduce MAGI other than NII, and other individuals will need to consider ways to minimize both NII and other types of MAGI.
...Estimate the effect of any year-end planning moves on the AMT for 2017, keeping in mind that many tax breaks allowed for purposes of calculating regular taxes are disallowed for AMT purposes. These include the deduction for state property taxes on your residence, state income taxes, miscellaneous itemized deductions, and personal exemption deductions. If you are subject to the AMT for 2017, or suspect you might be, these types of deductions should not be accelerated.
...If you were affected by Hurricane Harvey, Irma, or Maria, keep in mind that you may be entitled to special tax relief under recently passed legislation, such as relaxed casualty loss rules and eased access to your retirement funds. In addition qualifying charitable contributions related to relief efforts in the Hurricane Harvey, Irma, or Maria disaster areas aren't subject to the usual charitable deduction limitations.
Year-End Tax-Planning Moves for Businesses & Business Owners
...Businesses should consider making expenditures that qualify for the business property expensing option. For tax years beginning in 2017, the expensing limit is $510,000 and the investment ceiling limit is $2,030,000. Expensing is generally available for most depreciable property (other than buildings). The generous dollar ceilings that apply this year mean that many small and medium sized businesses that make timely purchases will be able to currently deduct most if not all their outlays for machinery and equipment. What's more, the expensing deduction is not prorated for the time that the asset is in service during the year. The fact that the expensing deduction may be claimed in full (if you are otherwise eligible to take it) regardless of how long the property is held during the year can be a potent tool for year-end tax planning. Thus, property acquired and placed in service in the last days of 2017, rather than at the beginning of 2018, can result in a full expensing deduction for 2017.
...Businesses also should consider making buying property that qualifies for the 50% bonus first year depreciation if bought and placed in service this year (the bonus percentage declines to 40% next year). The bonus depreciation deduction is permitted without any proration based on the length of time that an asset is in service during the tax year. As a result, the 50% first-year bonus write-off is available even if qualifying assets are in service for only a few days in 2017.
...Businesses may be able to take advantage of the "de minimis safe harbor election" (also known as the book-tax conformity election) to expense the costs of lower-cost assets and materials and supplies, assuming the costs don't have to be capitalized under the Code Sec. 263A uniform capitalization (UNICAP) rules. To qualify for the election, the cost of a unit of property can't exceed $5,000 if the taxpayer has an applicable financial statement (AFS; e.g., a certified audited financial statement along with an independent CPA's report). If there's no AFS, the cost of a unit of property can't exceed $2,500. Where the UNICAP rules aren't an issue, consider purchasing such qualifying items before the end of 2017.
...A corporation should consider deferring income until 2018 if it will be in a higher bracket this year than next. If Congress succeeds in dramatically reducing the corporate tax rate beginning next year, deferral of income until 2018 may be even more beneficial.
...A corporation (other than a "large" corporation) that anticipates a small net operating loss (NOL) for 2017 (and substantial net income in 2018) may find it worthwhile to accelerate just enough of its 2018 income (or to defer just enough of its 2017 deductions) to create a small amount of net income for 2017. This will permit the corporation to base its 2018 estimated tax installments on the relatively small amount of income shown on its 2017 return, rather than having to pay estimated taxes based on 100% of its much larger 2018 taxable income.
...To reduce 2017 taxable income, consider deferring a debt-cancellation event until 2018.
...To reduce 2017 taxable income, consider disposing of a passive activity in 2017 if doing so will allow you to deduct suspended passive activity losses.
...Increase your basis in a partnership or S corporation ownership interest, if doing so will enable you to deduct a loss from it for this year. A partner's share of partnership losses is deductible only to the extent of the basis in the partnership interest as of the end of the partnership year in which the loss occurs. An S corporation shareholder can deduct their pro-rata share of an S corporation's losses only to the extent of the total of their basis in S corporation stock and debt owed to them by the S corporation.
...Consider setting up a self-employed retirement plan if you are self-employed and haven't done so already. In particular, simplified employee pension plans (better known as SEP IRAs) do not need to be established or funded until the tax return due date, including extensions if filed. Therefore, the SEP IRA offers a significant post year-end tax planning opportunity for self-employed persons. Contributions made by the due date, including extensions, are treated as made on the last day of the previous tax return year, December 31, 2017 in this case.
These are just some of the year-end steps that can be taken to save taxes. Again, please contact us if you’d like to meet for a consultation so we can tailor a plan that will work best for you.
We’ll look forward to seeing you soon and wish you a Very Happy Holiday Season!