Year end 2017 is rapidly approaching and is presenting everyone with the challenge of not knowing what will happen with proposed tax legislation and its impact on future tax rates or the deductibility of expenses. While every situation will be different, in 2017 we are still faced with the overhang of the Alternative Minimum Tax (“AMT”) and the Pease limitation on Itemized deductions. On the other hand proposed legislation will potentially limit the ability to deduct certain expenses including certain state and local taxes, miscellaneous expenses and healthcare costs. In addition tax brackets may change resulting in an increase or for some a decrease in effective marginal tax rates.
That being said, there are still some strategies to consider before we say goodbye to 2017.
Consider making charitable contributions before Dec. 31. Remember that giving appreciated stock (a stock whose value exceeds its cost basis and has been held for over one year) can offer a greater benefit than giving cash, since it will eliminate the recognition of the capital gain. If 2017 will be a higher marginal tax rate year than 2018, maximizing deductions in 2017 could save more money.
Making qualified charitable distributions (QCD) from your IRA is another great opportunity for those who qualify. The benefit of doing a QCD to fulfill your required minimum IRA distribution (RMD) obligation is that your RMD is excluded from your income altogether. The requirements for donating all or a portion of your IRA RMD include:
- IRA owner must be 70 and a half or older.
- Charitable distribution must be made from a traditional IRA or ROTH IRA.
- $100,000 annual limit per taxpayer.
- QDC must be made directly from the trustee of your IRA to a qualified public charity. The check cannot be made payable to the IRA Owner, private foundation or donor advised fund.
By donating your QDC, you can fulfill both your required minimum distribution and charitable endeavors in a tax-favored way.
We say this every year, and it bears repeating, maximize your 2017 retirement contributions. If you participate in an employer-sponsored 401K plan, you should contribute at least enough to realize any potential “employer match.” Also consider increasing your deferral contribution for your last few paychecks of 2017 in order to maximize your tax savings.
Consider paying 2017 itemized deductions such as 2017 property taxes and fourth quarter state estimated taxes in 2017 in case they are eliminated or reduced as deductions in 2018. However, be sensitive to the impact in 2017 of AMT and the limitation of itemized deductions.
Capital Gains and Losses and Qualified Dividends
Look for any potential capital loss positions in your portfolio to offset any realized capital gains before year-end. After netting total realized capital losses against realized capital gains, you can deduct a maximum of $3,000 of capital losses against earned or other types of income for the same year. To the extent you realized capital losses exceeding $3,000, you may carry forward this loss to be used against future realized capital gains for an unlimited time period.
For taxpayers with very low income you may want to harvest capital gains. In 2017 taxpayers in the 15% bracket or less pay zero tax on long term capital gains. In 2017, that applies to married filers with taxable income up to $75,900 and single filers with taxable income up to $37,950. For the same taxpayers in the 15-percent-or-less tax bracket, this zero percent rate also applies to qualified dividends (generally dividends on U.S. individual stocks owned for more than the 60-day holding period) but not to non-qualified dividends (i.e., dividends on some mutual funds, REITS, MLPs and employee stock options). Non-qualified dividends are taxed the same as ordinary income.
It is also possible that tax reform will repeal the ability to do like kind exchanges after 2017, so if one is contemplating a sale that would qualify having it completed by year-end may be critical. In addition there is the potential that the existing gain exclusion for the sale of a principal residence will be reduced to half of what it currently is, so again if this applies to you may want to have a closing before year end.
Planning for Small Businesses
Certain small businesses that are structured as pass through entities may benefit if legislation passes that would cap the tax rate for such business income at 25%. For these businesses, deferring income to 2018 and accelerating deductions to 2017 makes more sense than ever. In addition remember that in 2017 small businesses can deduct equipment purchases up to $500,000 that qualify as Section 179 expenses.
Pending tax reform opportunities
No one knows what or if any tax legislation will be passed this year. However, given what is being discussed it may be the optimal time to position yourself for the proposed changes. Reform will most likely bring lower tax rates and greater limitations on deductions. Now is the time to consider deferring income to 2018, if possible, in light of the expected income tax rate reductions. Also consider accelerating deductions to 2017 — they will be worth more at 2017’s higher tax rates.
While we can’t know which future tax changes will make the final cut, there are still many opportunities to lower your taxes this year. This is a year when it may make sense to meet early with your tax preparer to consider your options.