UPDATE: Due to last minute provisions to the tax bill which developed after we released this information, and before the final bill passed, most of these recommendations are no longer valid. One of our favorite Easter Eggs in the Tax Bill which allowed for prepayment of state and local income taxes in order to claim the deduction on your 2017 return, was replaced with what we’re calling the Lump of Coal Provision. The Lump of Coal provision eliminated the opportunity to deduct prepayment of taxes in 2017. Additional information about the Lump of Coal, and the final GOP Tax Bill can be found here.
Year End Tax Tips in Light of Tax Code Changes on the Horizon for 2018
Don Huff, Director – Tax Department
2017 is quickly nearing the end, but did you know that there are still opportunities to reduce your 2017 tax bill and plan ahead for 2018?
As you may already be aware, the government is aiming to significantly alter the tax code, in turn eliminating many tax deductions you could currently be benefiting from. With changes in tax law on the horizon there are potential tax saving opportunities for you to consider that involve maximizing tax deductions that exist for 2017 that may disappear in 2018. So often, these become missed opportunities when people are unaware of impending changes and the effect the changes could have on them.
As a starting point, it is important to note that the timing of tax deductions has always been an important element of year-end tax planning. This is especially true in 2017 in light of the potential changes that are being contemplated by the House and the Senate. Deduction planning can be a challenge, factors such as varying income levels and the alternative minimum tax have a significant impact on the deduction strategy that makes the most sense from household to household. With that in mind, it is our belief that the following deductions are of the most importance with the changes being proposed at this time:
- (LUMP OF COAL PROVISION ELIMINATED THIS RECOMMENDATION) State and Local Income Taxes: Under the proposed tax law changes, the state and local tax deduction will be eliminated. If an elimination becomes effective for 2018, you will definitely want to accelerate your deductions into 2017 unless you are subject to the alternative minimum tax in which case there would be no benefit in doing so. Accordingly, if you anticipate a state income tax liability for 2017 and plan to make an estimated payment most likely due in January, consider making the payment before the end of 2017. It also may be worthwhile to go ahead and pay your first quarter estimate for 2018 prior to year-end. However, it could be a challenge making a 2018 estimated tax payment as forms may not be available yet in many states so other options for payment will need to be explored.
- Real Estate Taxes: Under the proposed tax law changes, the real estate tax deduction will be limited to $10,000. In situations where a taxpayer’s total real estate taxes for the year exceed $10,000, there may be an opportunity to pay a portion of your 2018 amounts due in 2017 providing a tax benefit that will otherwise be lost if proposed changes are approved. Unfortunately, if you are subject to the alternative minimum tax there is be no benefit in doing so. The ability to prepay will need to be addressed with taxing authorities. Additionally, if taxes are payed from an escrow account, it will likely be difficult to implement this strategy.
- Miscellaneous Itemized Deductions: Under the proposed tax law changes, the deduction for miscellaneous itemized deductions could be eliminated. This could include deductions like tax preparation fees, investment expenses and employee business expenses to name a few. With this in mind, it may make sense to prepay amounts for 2018 in 2017 in situations the opportunity exist. However, if you are subject to the alternative minimum tax there would be no benefit in doing so, therefore it’s important to keep that in mind.
- Charitable Contributions: Under the proposed changes, there may be reason to consider making anticipated charitable contributions for 2018 in 2017. Proposed increase in the standard deduction may preclude many from being able to itemize deductions in 2018 so accelerating deductions into 2017 will provide a one-time benefit that would otherwise be lost. Additionally, the anticipated decrease in tax rates will provide an opportunity for taxpayers to take a deduction against income being taxed at a higher tax rate if done in 2017. In light of this, taxpayers should consider the different options available for making these contributions such as donation of appreciated securities and utilization of donor advised funds.
These are a few of the areas that taxpayers need to be aware of as we approach the end of 2017. This list is not meant to be all encompassing, as various factors impact various households in various ways. Here at John G. Ullman & Associates, we will continue to follow the proposed changes and advise on opportunities we see as a result. If you have any questions or concerns regarding how the impending legislation may impact your personal tax situation, we recommend that you reach out to your Financial Advisor and/or Tax Professional to review your unique situation and ensure that you are best utilizing opportunities that exist now and are prepared for changes that could impact you in the new year.