On December 22, 2017, President Trump signed into law the 2017 Tax Cuts And Jobs Act. It’s been a good 30 years since the last time the Internal Revenue Code received such a major update.
Major Changes From The New Law Include:
Compressed And Lower Income Tax Rates For Individuals.
Increased Standard Deduction For Individuals
Elimination Of Personal Exemptions
Limitations of Deductibility Of Itemized Deductions including Mortgage Interest and State & Local Taxes.
Lower Corporation Tax Rates.
The Big Picture:
The tax rates are going down next year, so a deduction now is worth a lot more than it will be in 2018. On top of that, several popular deductions are disappearing next year or getting substantially limited and in combination with a nearly doubled standard deduction, less taxpayers will be itemizing deductions in 2018. The key here is to accelerate deductions into 2017 and defer income into 2018.
Following are seven year-end tax moves to make before this New Year’s Day:
1.Give more to charity in 2017.
In addition to the usual dollar donations to charities, religious institutions and educational institutions, consider clearing your home of those unwanted household goods and clothing to give to charities. Many groups will accept these items even vehicles, with some even making arrangements to pick up them up from your home. You may also consider to donate stock or mutual funds that you’ve held for more than a year but that no longer fit your investment goals. The charity gets the asset to hold or sell, and your portfolio re-balancing nets you a deduction for the asset’s value at the time of gifting. Even better, you do not have to worry about capital gains taxes on the appreciation of your gift. Remember that if you take the standard deduction in 2018, you won’t get any tax savings from your charitable contributions made in 2018.
2. Make the most of your home – mortgage interest.
Home-ownership provides a variety of tax breaks, some of which you can use by year-end to reduce your current year’s tax bill. Make your January mortgage payment by December 31st and deduct the mortgage interest on your coming tax return. In 2018, the amount of mortgage interest you can deduct will be reduced (from $1,000,000 of principal indebtedness to $750,000 of principal indebtedness) so you will want to maximize the amount of mortgage interest paid in 2017. Another tactic is to try to prepay your home-equity loan interest. That deduction goes away next year, so it’s worth calling your bank and seeing if you can prepay at least some of the interest so you can get the tax savings in 2017.
3.Make the most of your home – property taxes.
Like prepaying mortgage interest, the same tactic will apply for property taxes which along with other state and local taxes will be deductible only up to $10,000 starting in 2018.
4.Pay State And Local Income Taxes in 2017.
Starting in 2018 property taxes and other state and local taxes will be deductible only up to $10,000. People who typically pay their state income taxes quarterly can easily pay the January installment before the end of 2017. Likewise if you have an outstanding income tax bill with your state or local tax agency or expect to amend a prior year’s state income tax return that will result in you owing money, consider paying or prepaying these liabilities in 2017.
5.Pay your self-employed business expenses now.
If you are self-employed, you should accelerate payment of your business expenses in 2017. Recognizing these expenses in 2017 when tax rates are higher will provide you with a greater tax savings.
6.Catch up and prepay your “miscellaneous itemized deductions”.
If you pay union dues or a professional society membership fee (e.g. a chamber of commerce or bar association) or buy a lot of supplies for your job (e.g., professional musicians buying new instruments) that you normally deduct as miscellaneous itemized deductions on your taxes, you’ll want to buy everything you can by January 1st. All of these expenses constitute Miscellaneous Itemized Deductions which are deductible to the extent the total is more than 2% of your adjusted income. But that deduction is going away entirely in 2018. Another deduction that’s going away in 2018 is for tax preparation services. Ask your accountant now for the invoice they would normally give you in April after they file your tax return. If you can pay it now, you can still deduct it.
7.Defer your income into 2018.
Consider delaying income until January 2018 when the tax rates are lower, especially if you are a small-business owner. So if you are chasing up some customers or clients to pay the bill you sent them a while ago, you might want to wait until January to get aggressive on collecting. Consider delaying the delivery of invoices for year-end jobs until January 2018. In addition to lower tax rates, small business owners get a generous benefit starting next year of being able to deduct 20% of their business income tax-free. If you are an employee, ask your boss to hold your bonus until January. Individuals should also consider putting more money into a tax-deferred workplace retirement plan in 2017 and hold off on selling assets that will produce a capital gain until 2018.
But Beware Of The Bite Of The Alternative Minimum Tax!
If you will be subject to the Alternative Minimum Tax (“AMT”) in 2017, paying those state and local taxes, your property taxes, and your miscellaneous itemized deductions before this January 1st probably won’t help you because the AMT requires you to add back all of these payments and recalculate your tax bill, so the benefit of paying them in 2017 goes away.
What Should You Do?
You know that at the Law Offices Of Jeffrey B. Kahn, P.C. we are always thinking of ways that our clients can save on taxes. If you are selected for an audit, stand up to the IRS by getting representation. Tax problems are usually a serious matter and must be handled appropriately so it’s important to that you’ve hired the best lawyer for your particular situation. The tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County, San Francisco and elsewhere in California are highly skilled in handling tax matters and can effectively represent at all levels with the IRS and State Tax Agencies including criminal tax investigations and attempted prosecutions, undisclosed foreign bank accounts and other foreign assets, and unreported foreign income.