The end of the year is fast approaching and as such there are things one should consider regarding their tax situation. In a normal year the list of recommendations would be a list of actions to take before year end however this is not a normal year.
We urge you to consider our recommendations and contact us if you have any questions regarding these tips, specifically in light of the tax law change.
The overall strategy for 2017, is to defer income and accelerate deductions. The concept being that for 2018 it is possible that you will have a lower tax rate. As such, income will be taxed at a lower rate in 2018 and your deductions will result in a larger tax savings as they will be deducted in 2017 that would have a higher tax rate. Caution still must be exercised as there are a number of exceptions to the concept.
State and local income taxes along with real estate taxes are a target for elimination or significant reduction under the new tax bill. Therefore prepaying those taxes if possible may provide a benefit. That said they are also not deductible for alternative minimum tax purposes so accelerating the benefit may not reduce your tax liability as expected. Consult us and we can let you know the effect of accelerating your taxes.
Charitable contributions do not seem to be effected by either tax bill. However the standard deduction will be increased. So what does this mean? Assume you file a joint return and your itemized deductions are normally around $15,000. Under both bills the standard deduction will be in excess of this amount. Therefore a $1,000 contribution that you plan to make in January will have no tax effect however, if you itemize deductions for 2017, making that contribution in December will provide an additional tax savings.
Remember medical expenses are only deductible if you itemize your deductions and are limited to those in excess of 10% of your adjusted gross income. If you feel you may meet the 10% threshold in 2017, best to pay any medical expenses that you can before the end of the year. The definition of a medical expense for tax purposes is broad. Contact us if you are not certain.
Review where you stand with respect to capital gains for 2017. If you hold some securities that will generate a loss consider selling them before year end. Capital losses will offset capital gains dollar for dollar. Just remember losses in excess of capital gains can only offset other types of income to a maximum of $3,000 per year on a joint return. Any excess will carry forward to the next year. You should contact us prior to selling losses to review the “Wash Sale” rules.
Consider donating to a charity securities that have appreciated in value. Your charitable contribution will be at the fair market value of the stock when donated and you will avoid the recognition of any gain associated with the appreciation. There are limitations to the amount of the deduction as it relates to your income so contact us should you need guidance.
For those of you age 70-½ and older please remember that you can contribute up to $100,000 from your IRA to a charity and have these payments count as part on your required minimum distributions. The effect is to keep your adjusted income lower which may help to keep your tax liability down in other areas of your tax return such as medical expenses, the net investment income tax and the impact on your Medicare premiums.
Gifting is another way to reduce the burden on your estate. Yes the federal exemption is high and the House bill calls for the elimination of the tax however don’t forget certain states still have estate (inheritance) taxes. Pennsylvania is one of those states and the rate can get as high as 15% depending on the beneficiaries.
And finally we would be remiss if we did not remind you to be certain that your will is up to date. As we all know life changes and those circumstances that existed when your will was drafted may be completely different and can result in outcomes that you do not want. As such, we suggest you review your will as well as your life insurance to be certain that they reflect your current financial picture and responsibilities.