Year-End Tax Strategies

The House and the Senate have passed their versions of a tax reform bill and there are many similarities, including the limiting of itemized deductions to mortgage interest, charitable contributions, and property taxes, as well as the doubling of the estate, gift, and generation-skipping transfer tax exemptions from $5.6 million to $11.2 million in 2018. It’s possible, but not certain, that a final bill could land on the president’s desk for signature sometime before the end of the year. It appears the tax benefit goes mostly to corporations, and although the proposals lower tax rates in general, many people in high-tax states stand to pay even more.

What Can We Do Now?

Although the details of the final bill are not clear, there are a few things you can do before the end of the year. Keep in mind that in certain situations these strategies might not help. For example, if you’ll be subject to the alternative minimum tax this year or be in a higher tax bracket next year, taking some of these steps could have undesirable results.

Property Taxes

If your property taxes are high, it could be smart to prepay (by December 31) all property taxes that relate to 2017 but that are due in 2018, so you can deduct the payment on this year’s return. Next year the property tax deduction could be limited to $10,000. You generally can’t prepay property tax that relates to 2018 and deduct the payment on your 2017 return, although there is now talk in CPA circles that it may be possible this year. Ask your accountant to see if you are able to do this.

However, there are a few caveats: If you’re subject to the AMT in 2017, you won’t get any benefit from prepaying your property tax. And if the property tax deduction is retained for 2018, the prepayment could cost you a tax-saving opportunity next year. Also, if your income is high enough that the income-based itemized deduction reduction applies to you, the tax benefit of a prepayment could be reduced. Although the initial versions of both the House and Senate bills lower taxes for some, many might still end up being subject to higher tax rates in 2018, either because of tax law changes or because their income goes up. If the property tax deduction is retained, you might save more tax by holding off on paying property tax until when it’s due in 2018.

Charitable Donations

Both versions of the tax bills have provisions that make deductions in general less valuable. Because the standard deduction would increase significantly under both bills, some taxpayers might no longer benefit from itemizing deductions. This will have many unintended consequences, including possible deceased giving to non-profits. So you might want to increase your gift to your favorite charity in 2017 to get the full benefit.

Mortgage Payments

If you have a mortgage payment due in early January, it could make sense to pay that bill before December 31.

Tuition Payments

If you are usually eligible for a tax credit for your kids’ or grandkids’ tuition, pay the tuition bill before December 31 – you can do this for academic periods that will begin in January, February or March of 2018.

Let us know if you need help in gathering your 1099s or other tax documents. You will receive 1099 statements from both TD and Fidelity for 2017 – make sure you keep both. Send us a copy of your final TD 1099s, as we will not have access to those records at TD. We have all historical 1099s, and will have all Fidelity tax documents.

 

Blue Spark Capital Advisors

We're a fee-only Registered Investment Advisory and financial planning firm based in New York City and the Berkshires.

We specialize in working with women after divorce, death of a spouse, or other life transitions such as retirement or job change. We provide financial planning and investment management services.

We believe in a holistic approach. Movement in each piece of your financial plan impacts the others, so we consider your entire picture.

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