New tax changes have been announced all over the media. What does this mean for you? Wilklow and Associates have these suggestions for you. If you have any questions please contact them directly: www.wilklowassociates.com (719) 260-0320
As the end of the year approaches, it is a good time to think of planning moves that will help lower your tax bill for this year and possibly the next. In many cases, this will involve the time-honored approach of deferring income until next year and accelerating deductions into this year to minimize 2017 taxes. This time-honored approach may turn out to be even more valuable if Congress succeeds in enacting tax reform that reduces tax rates beginning next year in exchange for slimmed-down deductions. Regardless of whether tax reform is enacted, deferring income also may help you minimize or avoid AGI-based phase outs of various tax breaks that are applicable for 2017.
We have compiled a checklist of additional actions based on current tax rules that may help you save tax dollars if you act before year-end. Not all actions will apply in your particular situation, but you (or a family member) will likely benefit from many of them. We can narrow down the specific actions that you can take once we meet with you to tailor a particular plan. In the meantime, please review the following list and contact us at your earliest convenience so that we can advise you on which tax-saving moves to make:
- Net Investment Income tax and .9% Medicare Tax: For taxpayers whose adjusted gross income is greater than $250,000 (married filing jointly) the 3.8% surtax on certain unearned income is still in play for 2017 as well as the additional .9% Medicare tax on earnings either by employment or self-employment.
- Timing of income and expenses: This is very important in 2017 as we anticipate the new tax plan from Congress. Postpone income until 2018 and accelerate deductions into 2017 to lower your 2017 tax bill. This strategy may be especially valuable if Congress succeeds in lowering tax rates next year in exchange for slimmed-down deductions. This strategy could enable you to claim larger deductions, credits, and other tax breaks for 2017 that are phased out over varying levels of adjusted gross income (AGI). These include child tax credits, higher education tax credits, and deductions for student loan interest. Postponing income also is desirable for those taxpayers who anticipate being in a lower tax bracket next year due to changed financial circumstances. In some cases, it may pay to actually accelerate income into 2017. For example, this may be the case where a person will have a more favorable filing status this year than next (e.g., head of household versus individual filing status).
- Consider using a credit card to pay deductible expenses before the end of the year. Doing so will increase your 2017 deductions even if you don’t pay your credit card bill until after the end of the year.
- If you have investments that are at a loss, consider selling them prior to year-end to offset any investment gains that you have had during the year.
- If you expect to owe state and local income taxes when you file your return next year, consider asking your employer to increase withholding of state and local taxes (or pay estimated tax payments of state and local taxes) before year-end to pull the deduction of those taxes into 2017 if you won’t be subject to alternative minimum tax (AMT) in 2017. Pulling state and local tax deductions into 2017 would be especially beneficial if Congress eliminates such deductions beginning next year. We encourage payment of your property taxes in 2017 for amounts due in 2018.
- Estimate the effect of any year-end planning moves on the AMT for 2017, keeping in mind that many tax breaks allowed for purposes of calculating regular taxes are disallowed for AMT purposes. These include the deduction for state property taxes on your residence, state income taxes, miscellaneous itemized deductions, and personal exemption deductions. If you are subject to the AMT for 2017, or suspect you might be, these types of deductions should not be accelerated.
- You may be able to save taxes by applying a bunching strategy to pull “miscellaneous” itemized deductions, medical expenses and other itemized deductions into this year. This strategy would be especially beneficial if Congress eliminates such deductions beginning in 2018.
- HSA Contributions: If you have a high deductible medical insurance plan, consider setting up and contributing to a HSA. You have until 04/17/18 to make a 2017 contribution, make sure that you indicate that this is a “2017” contribution. Maximum contribution for a single is $3,350 (if over 55 $4,350) and $6,750 ($7,750) for a family.
- Educational Credits: If you have a child in college, review the income limitations for the American Opportunity Credit. This credit is the most valuable education credit and each child is eligible for $2,500. The credit is dollar for dollar for the first $2,000 of the student’s expenses and then 25% of the next $2,000. The phase out for married couples is from $160-180K, and for singles the phase out if $80-90K, using modified adjusted gross income. If your income is going to limit this credit then you might consider contributing more to your 401K or traditional IRA.
- Contributions to 401K and Traditional IRA: Maximum contribution to a traditional IRA is $5,500 or $6,500 if over 50, and to a 401K is $18,000 or $24,000 if over 50. Contributions to an IRA have to be made by 4/17/18.
- Gifting: If you are concerned about estate limitations or would like to distribute wealth while you are alive, then consider gifting. This is not a tax deduction but an estate reduction. You and your spouse are eligible to exclude from a gift tax return up to $14,000 per recipient per year. Which means that you and your spouse may gift $28,000 to one individual in any year. The estate exclusion for 2017 is $5,490,000.
- 529 Plans: Contributions to the Colorado 529 Plan(s) are deductible from Colorado state income tax in the calendar year of the contribution, up to your Colorado taxable income for that year. As a grandparent or someone other than a parent, you may gift a contribution to a 529 plan. Your limitation is only the gift tax limit. The contribution reduces the state taxable income for Colorado as long as you set up a plan in Colorado.
- Tax Extenders: These are tax provisions/law/tax items that expired 12/31/16, and they have been available the last 7 or so years. The ones to be aware of that might have an impact on you are:
- Exclusion for discharge of indebtedness on a principal residence.
- Students and parents to receive an above the line deduction for tuition expenses.
- Treatment of mortgage insurance premiums (MIP) as deductible qualified residence interest.
- Energy credit for certain nonbusiness energy property.
- Energy credit for residential energy property.
If you would like to discuss any of the above topics with Wilklow and Assoc. or would like Wilklow and Assoc. to calculate your estimated tax liability for 2017 prior to year-end, Wilklow and Assoc. would love to help you. Please call the front desk and schedule an appointment. Tax planning is a great tool for not only individuals who have seen a change in their W-2 income, but individuals that have income from pass thru entities.