2017 Year-End Tax Planning for Individuals

December 05, 2017 | News

The successful passing of tax reform bills by the House and the Senate ensures that in 2018 taxpayers will face new tax laws and new opportunities.  However, because the final tax reform legislation is extremely unlikely to apply retroactively to the beginning of 2017, taxpayers should consider year-end tax planning for 2017 under the current tax laws.  Individual taxpayers can use several year-end planning strategies to maximize their tax benefits for 2017 as discussed below.

Accelerate Deductions

For most taxpayers, marginal income tax rates will be lower in the future, rendering income tax deductions less valuable.  Additionally, some income tax deductions could be limited or even eliminated in the coming years.  Thus, many taxpayers should pay deductible expenses in 2017 instead of 2018, if feasible.  For instance, you may be able to prepay property taxes in order to receive a deduction for 2017.  You might also consider prepaying mortgage interest in order to increase your mortgage interest deduction for 2017.  Taxpayers should consult with their CPA as soon as possible and consider taking steps to accelerate deductions before December 31.

Postpone Income

Again, because it appears that most taxpayers will be in a lower marginal income tax bracket beginning in 2018, taxpayers should consider whether it is feasible to push income in 2018. Income postponed until next year may benefit from being taxed at the lower marginal income tax rates. For instance, if you are eligible for an end of year bonus, you should consult with your employer to see if such bonus could be paid after January 1, 2018.

Charitable Planning and Donating Appreciated Assets 

Charitably inclined taxpayers may want to fund charitable trusts, private foundations, or donor advised funds or make charitable donations before the end of 2017.  Making charitable gifts before the end of the year will allow taxpayers to claim a charitable income tax deduction for 2017 that may be less valuable in 2018 and future years depending on changes in the tax laws.  Taxpayers may want to specifically consider donating appreciated assets to charity in 2017 to gain the additional benefit of avoiding capital gains tax on the disposition of the assets.

IRA Charitable Rollover

Taxpayers who are age 70 ½ or older can transfer up to $100,000 directly from an IRA to a public charity.  This transfer avoids recognizing income on the transferred amount, but does not generate a charitable deduction.  Such a transfer counts towards the required minimum distribution from the IRA.  This charitable rollover can be an important tool to minimize adjusted gross income, which is a measure for various other tax items like itemized deductions and the 3.8% Medicare surtax.

Maximize Contributions to Retirement Plans

Taxpayers should maximize contributions to employer-provided retirement accounts or other accounts that the taxpayer may own.  These contributions provide tax benefits as well as prudent planning and saving for retirement.  Be aware that different types of retirement plans have different limits on how many pre-tax dollars may be placed into an account. For example, the 2017 elective deferral limit for a 401(k) is $18,000, with an allowed catchup contribution amount of $6,000 for individuals over age 50.  However, a total of $54,000 may be contributed to a 401(k) in 2017.

Plan for the Medicare Surtax

The Medicare surtax of 3.8% applies to the net investment income of taxpayers who have adjusted gross income over certain thresholds ($200,000 for a single filer; $250,000 for married filers).  Planning that will harvest losses and reduce adjusted gross income by year end can minimize exposure to the Medicare surtax. Taxpayers who have high adjusted gross income and substantial passive investment income should work with their CPA and other tax advisors to determine if they can minimize the effect of the Medicare surtax before December 31.