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Year End Tax Plans
BY JOHN SAVIGNANO, CPA
It’s time to review your year-end tax plans. And
this year, planning comes with a kicker: Be sure to
factor in the odds of tax changes. Both the Senate
and the House Tax proposals, while markedly different
when it comes to details, would revise tax brackets
and pare back some breaks. Proposed changes
would apply to post-2017 tax years. Though the
scope of any final bill is a moving target, we think
passage of tax legislation is still in the cards.
Most people will benefit by using this strategy:
Defer income and accelerate deductions. This
game plan, which normally pays off taxwise, now
has even more importance. You’ll gain by deferring
income to 2018 in anticipation of bracket changes.
Ponder delaying a dividend from a closely held
firm or postponing a year-end bonus. IRA owners
who turned 70 ½ this years may want to postpone
taking their 2017 payout until April 1, 2018. Doing
so delays the tax bill and could potentially save you
money. With many deductions in peril, use them
this year while you still can.
Filers who take itemized deductions have
flexibility in shifting write-offs. State and local
income taxes, this break is currently on the chopping
block. Mailing your estimate due in Jan. by
year-end lets you claim the deduction in 2017.
Residential real property taxes, they’re in flux, but
it looks as if any final bill would cap this break at
$10,000 or so. Prepay taxes on your home this year
if you can. Interest, if you make the Jan. 2018 mortgage
payment on your residence before the end of
the year, you are able to deduct the interest portion
in 2017. Charitable contributions, this writeoff
is safe, but it may not be as valuable next year
if standard deductions are raised. You can accelerate
donations into 2017, but you must charge them
or mail the checks by Dec. 31 to ensure a 2017
write-off. Medical expenses, the House wants it
gone, while the Senate would work keep it. If your
2017 medicals have exceeded the 10%-of –adjusted
gross-income threshold or are close to it, think
about getting and paying for elective procedures
by Dec. 31. Moving costs, the House and Senate
would both scrap this deduction. So if you’re contemplating
relocating for a job, you may want to do
so before year-end.
Your tax planning may be affected by some special
situations this year. Watch out for the bite of
the cutback in itemizations for upper-incomers.
If you’re in this group of taxpayers, there’s potentially
good news on the horizon: The House and
Senate bills would put an end to this hidden tax
hike after 2017. The alternative minimum tax can
throw a monkey wrench into your plans because
deductions for many items, such as some accelerated
depreciation write-offs and state and local
taxes, aren’t allowed in figuring the AMT. So, prepaying
a realty bill due in early 2018 or a Jan. 2018
state income tax estimate won’t work for the AMT.
Keep in mind that Congress wants to repeal or limit
the AMT. So Taxpayers who are subject to it need
to consider whether it would help them taxwise to
delay to 2018 breaks that would otherwise be nixed
in 2017 by the AMT rules.
Now turn to year-end planning advice pertaining
to your investments. There are lots of tax-saving
opportunities as well as pitfalls to avoid. Note
that the Senate and House tax bills would keep
the current rates for dividends and long-term
capital gains… 0%, 15% and 20%... and the 3.8%
If you have some losers you want to dump, consider
selling them. Capital losses can offset your
capital gains plus to $3,000 of other income. Any
excess losses can be carried forward indefinitely
to help offset future capital gains. If you have capital
loss carry forwards from earlier years, cull your
portfolio for gains. That because your net gains…
up to the carry forward amount… won’t be taxed.
See if you qualify for the 0% rate on long-term
capital gains and dividends. If your taxable income
other than gains or dividends is in the 10% or 15%
tax bracket, then dividends and profits on sales of
assets owned for more than a year are tax-free until
they push you into the 25% bracket. For 2017, this
bracket starts at $37,950 for single filers, $50,800
for heads of household and $75,900 for married
couples. But understand the potential downsides.
Zero-percent gains and dividends are included
in AGI, which can cause higher portion of Social
Security benefits to be taxable and can squeeze
some itemized deductions such as charitable donations.
Also, your state income tax bill may rise, as
most states tax gains as ordinary income.
Take steps to limit the sting of the 3.8% surtax
on net investment income… taxable interest, dividends,
gains, rents, annuities, royalties, passive
income and such. Singles with modified AGIs over
$200,000 and couples over $250,000 could owe
the tax. Among the ways to ease the pain of the
tax: Purchase municipal bonds. Tax-free interest
is exempt from the 3.8% levy and doesn’t affect the
owner’s AGI. If selling property, use an installment
sale to spread out a large gain. And, if feasible, do a
like-kind exchange of investment realty instead of
a taxable sale to defer the gain.
Donate appreciated stock or mutual fund shares
to a tax-exempt charity. Provided you’ve owned the
property for more than a year, you can deduct it full
value. And neither you nor the charitable organization
has to pay tax on the appreciation. However,
beware of donating property that has fallen in
value. If you do so, the capital loss is wasted. You’re
better off selling the loser, claiming the capital loss
on your tax return, and then contributing the proceeds
to the charity of your choice.
Here’s another tip if you’re feeling charitable and
you own a traditional IRA. People age 70½ and older
can transfer up to $100,000 yearly from their IRAs
directly to charity. The transfers count as part of your
required minimum distribution. But unlike other
IRA payouts, these direct donations aren’t added
to taxable income, so they don’t reduce the value of
your itemized deductions or personal exemptions.
Of course, if you do this, you aren’t able to double
dip by deducting the donation.
Act soon if you did a Roth IRA conversion this
year and want to undo it. Under present law, you
have until Oct. 15 of the year following the conversion
to transfer the funds back to a traditional IRA.
This is called a recharacterization. The Senate and
House tax bills would bar recharacterizations after
2017. If the proposal is enacted, you must act by
Dec. 31, 2017, to undo a 2017 conversion. If your
investment has gone south or you’ll be in a lower
tax bracket next year, contact your broker for the
steps to unwind the transaction before it’s too late.
John Savignano is a partner with Savignano
Accountants & Advisors located at 47-46 Vernon
Blvd., Second Floor, in Long Island City. If you
have any questions or require additional information,
please call John at 718-707-0955.