What Potential Tax Reform Means for Year-End Planning

On Friday, December 1, 2017 the Senate was voted on their version of the Tax Cut and Jobs Act. Rumblings out of Washington DC indicate that the GOP leadership has reached an agreement that the House will put the Senate version to a vote without reconciling the differences between the House and Senate versions.  As a result, the Senate version would prevail and it would become the new tax law if the President signs the legislation, which he has said he will do. But no one has a crystal ball and we will be following this closely.
Whether or not the Senate version prevails or a reconciled version is passed, it appears likely some form of the Tax Cut and Jobs Act will be passed and take effect in 2018.  With the prospect of major tax reform on the horizon, some strategies can be employed before the end of the year that can substantially reduce your 2017 tax bill by maximizing deductions that may not be allowed after 2017.

Itemized deductions under current law include 5 major categories: medical, taxes, interest, charitable gifts and miscellaneous deductions.  Under the proposed tax reform, certain of these deductions would be limited or eliminated. If that is the case, then taxpayers who itemize in 2017 should take the following actions before the year’s end to maximize their 2017 deductions:

1. Medical – The House version of tax reform does away with medical deductions beginning in 2018 while the Senate version retains them. So to be on the safe side you may want to consider paying all outstanding medical bills, but keep in mind that the total amount of unreimbursed medical expenses is only deductible to the extent that it exceeds 10% of your adjusted gross income (AGI). Some anticipated medical expenses can be prepaid. An example would be a dental bill, if you have a child receiving orthodontic treatment for braces and you are on an installment payment plan. You can pay off the bill and increase your medical deductions for 2017, and the dentist might even give you a discount for paying early. But if you can’t reach the 10% of AGI threshold, don’t make a special effort to pay any outstanding medical bills.
2. Property Tax – The Senate version of tax reform eliminates all property tax itemized deductions beginning in 2018, while the House versions retains a limited deduction. If the property taxes on your home, second home or vacant property are being paid in installments with an installment due in 2018, it may be appropriate pay that balance in 2017 to increase your tax deductions for this year.
3. State Income Tax – Both the House and the Senate versions of tax reform eliminate the deduction for state and locale income taxes beginning in 2018. If you reside in a state that has a state income tax, estimate your 2017 state tax liability and make sure your full liability is paid before the year’s end. You can ask your employer to boost the amount of your state withholding by a reasonable amount, or if you are self-employed, pay your 4th-quarter estimate due in January in December and increase your deduction.

       Note:  Taxes are not deductible for alternative minimum tax (AMT) purposes.  The tax-maximizing strategy could trigger the alternative minimum tax (AMT).

4. Miscellaneous Deductions – This deduction category includes un-reimbursed employee business expenses, investment expenses, certain legal fees, casualty losses, gambling losses and others. Generally, few of these expenses would support payments other than when they occur, and this category is only deductible to the extent that the deductions exceed 2% of your AGI.

Even though the strategy of prepaying tax-deductible expenses this year may yield tax savings, be thoughtful about borrowing money to execute this strategy. Interest on borrowed money can dampen the tax benefits.

Even though the strategy of prepaying tax-deductible expenses this year may yield tax savings, be thoughtful about borrowing money to execute this strategy. Interest on borrowed money can dampen the tax benefits.

Three Other Strategies

If you are an investor, a popular year-end strategy is to review your stock portfolio and sell off losers to offset your gains.  Also remember: you are allowed to deduct a loss of up to $3,000 ($1,500 for married filing separate taxpayers) from the sale of investments.  However, your investment strategies should take precedent over selling stocks to develop a loss.

Make the most of post-secondary education tax credits.  Both the Lifetime Learning Credit and the American Opportunity Credit allow qualified taxpayers to prepay tuition bills in 2017 for an academic period that begins by the end of March 2018.  This means that if you are eligible to take the credit and you have not yet reached the 2017 maximum for qualified tuition and related expenses paid, you can bump up your credit by paying the tuition for early 2018 before the end of 2017.  This strategy may not apply to you if you’ve been paying tuition expenses for the entire 2017 tax year, but if your student just started college this fall, it will probably provide you with some additional help.

If you own a business and are considering purchasing equipment before the end of the year, take note that most equipment purchased by a small business can be expensed and will provide a substantial tax deduction.  Keep in mind that just purchasing the equipment will not give you a tax deduction. You also must place the equipment in service before the end of the year, so you need to plan ahead and not wait until the last minute.