This year is no different than past ones in terms of tax planning for individuals and the uncertainty as we await the arrival of the final tax regulations. By now, you have all heard or read about the various tax proposals issued by the House and the Senate. We do not want to be silent on the topic but also know that due to this uncertainty it is extremely difficult to plan for not only this year but future years. The planning topics listed below are based on the current tax law as of the date of this publication.
Planning ideas for individuals:
Payment of State and Local Taxes – If you are not projected to be in an Alternative Minimum Tax situation, it might be best to prepay your state and local taxes by December 31, 2017, to get the benefit of deducting those payments on your 2017 Federal tax return. The most common taxes that are deductible are state or local estimated income taxes and property taxes, including installment payments due in calendar year 2018. Make sure, however, that your projected state income tax liability is reasonable when making these payment decisions since any overpayment of your state taxes will be taxable in 2018.
Charitable contributions – Consider donating appreciated stock held for more than one year to a qualified charitable organization. The fair market value on the date of the donation is a deduction to you, and it eliminates you having to pay tax on the capital gain from the appreciation if you had sold the stock and donated the cash from the sale to the charity.
Education costs – Evaluate whether to make a tuition payment in December versus January. The timing of the payments has the greatest impact in years when you have a student who is just starting higher education or close to graduation as timing can be more critical in these years.
Capital Losses & Gains – If you incurred large capital gains this year, consider selling stocks in your portfolio that have losses to help offset the gain already realized. Please note, however, you must wait at least 30 days before repurchasing this security so as to avoid the “wash sale” rules. The reverse can be true as well if you incurred large capital losses, consider selling appreciated stock to utilize against those losses. You can subsequently repurchase the appreciated stock sold to “reset” your cost basis in that stock as “wash sale” rules only apply to sales of stock with losses. It is important to work with your tax advisor if you wish to consider this option in order to maximize the tax benefit and to consider loss carryforwards that you may have already incurred.
Defer Income – It may make sense to defer income like bonuses to the following tax year in certain situations, especially if your income fluctuates from year-to-year.
Prepay Deductions – Just like with deferring income, it may make sense to prepay some deductions. Furthermore, utilizing a credit card to incur the expense may be helpful since the tax deduction is allowed in the current year while the credit card payment may not be due until January of next year. Careful planning with your tax professional can help you maximize these benefits, particularity in years when you straddle different tax brackets.
Maximize Retirement Contributions – IRA contribution limits remain unchanged at $5,500, with an additional catch-up contribution for individuals over age 50 of $1,000. You can make contributions to your IRA for 2017 up to the filing deadline of your 2017 tax return. Employer-sponsored 401(k) limits also remain unchanged at $18,000, with an additional catch-up contribution for individuals over age 50 of $6,000. Self-employed individuals also have retirement plan options. The contributions for these plans vary based on the type of plan, and you have longer to make contributions so consult your tax advisor to see what benefits this may have for you.
Pre-tax Savings Plan – Health Savings Accounts (HSA) and Flexible Spending Accounts (FSA) are tax savings opportunities that allow you to make pre-tax contributions to these qualified plans. Therefore, your out of pocket medical costs are being paid with pre-tax money from either your HSA or FSA. Furthermore, consider increasing your contributions to these plans if your out of pocket medical expenses are more than your current contributions and remember any contribution is made with pre-tax dollars so the true cost to you for making these additional contributions is not the amount you elect to contribute. Be sure you will have enough qualified expenses if funding a FSA since this plan is a “use it or lose it” plan. Any unused balance in a HSA rolls over from year-to-year and can be a great tool for those unexpected medical issues.
Gifts – The annual gift exclusion has remained the same at $14,000 per individual. Married couples can jointly gift $28,000 to any one individual. You can pay medical bills and tuition payments directly to the medical facility or school for an individual without these amounts being considered gifts. The payments also do not get added into other gifts given to the same individual(s). Please remember that any gift above the annual exclusion amount must be reported on a gift tax return.
A Note About the Proposed Tax Law Changes
Under both the House and Senate’s version of the Tax Cuts & Jobs Act, individual income tax brackets will change for all filing statuses. Both versions also currently show an elimination of the Alternative Minimum Tax and changes to itemized deductions, amongst many other proposed items. It is too soon to predict what, if any, tax law changes will become law.
The professionals at MarksNelson will continue to monitor and stay well-informed on tax law changes. Please call your MarksNelson advisor at 816-743-7700 to discuss how to best plan for your individual needs given both the current law and the proposed changes.