It is said that the only things certain in life are death and taxes. Unless, of course, you are talking about the sweeping tax reform legislation set to become law this week. It’s been over thirty years since the last major tax reform. With such significant changes taking effect in just a few short weeks, it may be valuable to consider several last-minute tax moves before you flip the calendar to 2018.
Since everyone’s situation is unique, be certain to consult with your tax professional before making any moves. That being said, here are some things to consider for your discussion:
- State and Local Income Taxes. Proposed changes mean that starting next year, state and local income and property taxes will be deductible up to a combined $10,000 cap. If you expect to hit this limit next year and are not subject to AMT (aka Alternative Minimum Tax), it may be worth paying any remaining 2017 state tax liability, including Q4 estimated taxes, by the end of this year. The same is true if you have reason to believe your tax rate may be lower next year.
- Property Taxes. While you cannot pre-pay 2018 income taxes, you may be able to catch an extra break by paying some of your 2018 property tax bill this year. Again, the benefit of this strategy is dependent on if you expect to exceed the combined $10,000 state and local tax deduction cap and whether your tax rate is expected to decrease (not to mention AMT exposure) in 2018.
- Charitable Contributions. The tax overhaul nearly doubles the standard deduction, which creates a larger hurdle for claiming itemized deductions like charitable contributions. As a result, some taxpayers who currently itemize are likely to switch to the standard deduction next year and won’t receive a tax benefit for their charitable giving. In that case, it may be advantageous to maximize contributions this year. On the other end of the spectrum, those taxpayers who make substantial contributions may be better off waiting for the 50% AGI limitation to be expanded to 60% in 2018.
- Employee Expenses. Current tax law allows employees to deduct unreimbursed expenses related to their jobs as long as they’re more than 2 percent of income. The tax bill ends these itemized deductions after the end of this year. So, workers should think about whether they can pay —and get the receipts—for as many of these expenses as possible this month. Examples of unreimbursed expenses for employees might include tools and supplies, occupational taxes, work uniforms, union dues, and expenses for work-related travel. Self-employed people and business owners would still be able to deduct expenses under the new tax bill.
- Moving Expenses. Under the proposed law, you’ll no longer be allowed to deduct work-related moving expenses after the New Year (unless you’re in the military). Of course it might be difficult to schedule a cross-country move on such short notice, but, if you did move, make sure you clear up any moving-related expenses by Dec. 31.
- Alternative Minimum Tax. The Alternative Minimum Tax (AMT) system is changing dramatically in 2018. If the AMT applies to you for the 2017 tax year, it is possible that deductions such as state, local and property taxes may be less valuable than they will be in 2018. Talk with your tax professional to see what strategy makes sense given your specific situation.
Once again, it is important to stress that individual needs and financial goals are highly singular. Make certain that any strategy or tax moves are genuinely in your best interests.
The new tax rules will bring a plethora of planning opportunities in the New Year. In the meantime, enjoy the holidays and have a happy New Year!