By Leon LaBrecque, JD, CPA, CFP®, CFA
LJPR Financial Advisors
As if year-end wasn’t busy enough, Washington has given us more to think about on taxes and you may want to make time for some of these last-minute tax tips. Going forward after 2017 many taxpayers will take the increased standard deduction, and never itemize their deductions again. Several are reliable old tricks, but the new tax law adds last chance urgency to some and creates new planning opportunities, depending on your circumstances.
Income. If you can control your income (if you own your own business for example) consider deferring the collection of invoices; don’t send out those last minute invoices – if you don’t bill your customer until the first week of January, they can’t pay you in December! Pay all of your own bills so you can deduct the expenses this year though. Tax rates are lower next year for almost everyone.
Charitable Contributions. Starting January 1, 2018, the new tax law still allows you to deduct charitable donations, but the threshold for doing so has been increased due to the boost in the standard deduction to $12,000 for singles, $18,000 for heads-of-households and $24,000 for joint filers. Many taxpayers who now itemize will likely find themselves taking the new standard deduction instead. If this affects you, consider making additional charitable contributions before December 31st. Mailing a check or donating online by credit card before year-end counts as a 2017 donation, even if the check doesn’t clear your bank, or even if you don’t pay the credit card bill until 2018. Most organizations make it very easy to give them money on their websites. Clean out your closet and garage – take the stuff to Salvation Army or Goodwill (however we’ve heard some places are starting to refuse donations since they can’t process all the incoming ‘stuff’). It is still not too late to open a Donor Advised Fund or Community Foundation and donate highly appreciated stock or mutual funds – most of the time this can be done online in 15-20 minutes.
Roth conversions or retirement plan withdrawals. If you make some extra-large donations this year consider offsetting those amounts with extra IRA withdrawals or do a similar sized Roth conversion. This may not save you taxes this year, but it may allow you to sneak some extra income out of your IRA without paying more taxes than you ordinarily would. Warning: The new tax law now prohibits you from recharacterizing ROTH conversions at a later date – no more ‘mulligans’ allowed!
Property taxes and state income taxes. Even if you can still itemize in 2018, there is a new $10,000 cap for all taxpayers regardless of filing status for property taxes and state/local income taxes. Pay your winter property tax bill before December 31st; if you pay estimated state income taxes, pay that before December 31st too. Renew your license plates if you’ve already received the bill. Warnings: if you are subject to AMT (Alternative Minimum Tax) in 2017, prepaying your taxes won’t benefit you. Also, the new tax law expressly prohibits you from deducting a significant prepayment of your 2018 state income taxes by disguising it as an overpayment of your 2017 taxes – estimate your 2017 state income tax aggressively, but carefully.
Interest expense. Consider prepaying your January mortgage payment this year instead so you pay 13 months of interest expense in 2017. Chances are you won’t be able to deduct that interest in future years due to the new higher standard deduction. Also, interest on home equity loans will no longer be deductible – make a plan to get those paid off as quickly as you can.
Investments. With the strong stock market we’ve had, you may not have many losers in your portfolio, but if you do, consider selling them in 2017 so you can take the loss on this year’s tax return (harvest the losses). This may also give you an opportunity to sell some winners without incurring taxes and to rebalance your portfolio along with it. You can’t deduct the losses if you buy back the losers you’ve sold within 30 days before or after you sell it. Doing so creates a ‘wash-sale’ loss that you have to defer until you sell the newly acquired shares sometime in the future. Wait more than 30 days to buy it back.
Gifts to kids or others in lower tax brackets. If you have gains in your taxable investment accounts, consider making a gift of that stock or fund to your child or parent if they are in a lower tax bracket. Have that person sell the stock this year to realize the gain. Most likely that person will pay no tax on that gain – but beware of the Kiddie Tax which taxes investment income over a certain amount at their parent’s tax rate.