10 tax moves to make by Dec. 31 — and before Congress changes the tax laws
Friday, December 01, 2017
Hello, holidays! We're so happy you and your good cheer have finally arrived.
But the arrival of December also means 2017 is almost over, giving us only 31 days to take care of tax tasks that could save us money when we file our returns next year.
This year, it also looks like Congress might actually make some tax changes, if not accomplish real tax reform. If that does happen, the good news is that we don't have to worry about deciphering them before we do our 2017 taxes.
The tax law changes being debated this month won't take effect until the 2018 tax year. And those 1040s aren't due until 2019.
But we still need to pay attention to what could happen to the Internal Revenue Code because it could affect some of our 2017 year-end tax moves.
Demise of deductions: Right now, the most concerned taxpayers are those who itemize.
Both the House bill (H.R. 1, the Tax Cuts and Jobs Act, which was approved last month) and the Senate measure (which that chamber will try to pass today if it can allay some Senators' deficit concerns) call for elimination of many most deductions.
UPDATE, Dec. 2: The Senate passed its version of tax reform early (1:30 a.m.-ish) Saturday morning. It is different from the House bill, so the two versions must be reconciled in a conference committee.
UPDATE, Dec. 22: The two bills were hashed out and the legislation signed into law today, 12/22/17. The changes affecting possible year-end moves are noted (via updated info or strike-through text) in the applicable segments below. A special note here: The revised individual tax provisions in the new law will, for the most part, expire at the end of 2025. That was a requirement to meet the financial limitations of the reconciliation process that the Senate used to pass the bill.
With the possible tax law changes in mind, here are seven itemized deduction-related moves to make now, along with three other more conventional pieces of tax advice we're all heard (or given) about this time for the last few years to bring the list to the invitingly clickable number of 10.
- Pay your state taxes ASAP. If you live in one of the 41 states and Washington, D.C., that tax wage and salary income, pay as much of those taxes as you can this year while they're still deductible. A good way to do this is to make any final state estimated tax payments this month.
NEW TAX LAW: All state and local taxes (SALT) are limited in 2018 to a $10,000 itemized deduction. The law specifically prohibits pre-paying state income taxes for the 2018 tax year. However, some tax experts (me included) argue that prepaying your state's final 2017 estimated tax amount that's due in January now is OK since it's for 2017 taxes.
- Buy a car. Or a truck, SUV, van, motorcycle, off-road vehicle, motor home, recreational vehicle, boat or airplane. Even look into purchasing a mobile or prefabricated home. Currently, the sales tax on all these major purchases is deductible. That's true even if you use the standard sales tax deduction tables the Internal Revenue Service creates for each state; the major purchase sales tax is added to that prefigured amount. But if when the sales tax deduction goes away is limited next year, so does this bonus tax write-off might not do you any good.
- Pay your real estate taxes early. There appears to be some legislative leeway here, with the House bill allowing deduction of real estate estate taxes of up to $10,000. If your property tax bill is higher than that, and yes in areas where home values have appreciated nicely that's possible, pay it in December instead of its early 2018 due date when you might lose some of its deductibility.
NEW TAX LAW: While you might get shafted by not being able to pay state income tax early, the new tax law says it's OK, in some instances, to prepay your 2018 local property taxes early. The IRS on Dec. 26 issued some guidance on this option (discussed in my subsequent 7 tax moves post) indicating that making this move might not be as easy as it first seemed. But for some, this might be a good tax move. However, make sure the tax savings in 2017 are worth the possible budget implications of coming up with such a large amount of money on short notice.
- Prepay your January mortgage. Both the House and Senate tax bills would keep the mortgage interest deduction in some form as an itemized expense, but the larger standard deduction amounts could make this write-off moot. Prepaying your January mortgage payment in December will push that deductible interest amount into this year. It might not be that much, but at least you get one more month's use of it on your 2017 tax return.
- Go to the doctor. Medical expenses are deductible only if they exceed 10 percent of your adjusted gross income (AGI). That's a lot for a lot of taxpayers, but if you've had a particularly challenging year as far as your or family members' health, this is the year to make sure you don't waste any expenses. In addition to year-end doctor and dental visits, make sure you don't overlook other possible medical deductions.
NEW TAX LAW: In the final discussions of the the tax law, Congress decided to actually make this deduction easier for a couple of tax years. On your 2017 return you'll file this coming year — yes, this is a retroactive tax change! — and the 2018 tax year Form 1040 due in April 2019, you'll be able to deduct medical costs on Schedule A that are more than 7.5 percent of your AGI.
- Bunch miscellaneous expenses. Among the Schedule A deductions that face potential tax reform extinction are miscellaneous expenses. These include such things as job search costs; investment related costs, such as the fee for the safe deposit box where you keep your stock certificates; and even the cost of doing your taxes, such as accountant fees or the cost of your computer tax preparation software. But like the medical deduction, you must have more than a certain percentage — this time it's 2 percent of your AGI — for all your miscellaneous expenses to count on Schedule A. You can get there by bunching expenses into the 2017 tax year.
NEW TAX LAW: The miscellaneous deductions on Schedule A were indeed eliminated as part of the final tax bill. So make the most of them while you can in 2017.
- Give, give, give to your favorite charities. Again, this deduction looks safe, but if your other itemized deductions are gone and the standard amount is increased, you're probably not going to have enough in donations alone to warrant filling out Schedule A. So consider at least doubling up donations to your favorite nonprofits this year when you can still claim the gifts, as long as you follow the current IRS donation deduction rules.
NEW TAX LAW: The itemized deduction for gifts to IRS-qualified nonprofits is still in the tax code. However, the doubling of the standard deduction amounts means that many people will not find it worthwhile to fill out a Schedule A. You can get a final (at least for as long as these individual tax laws are in place, which right now is through 2025) boost of your charitable deduction in 2017 by giving more by Dec. 31 to your favorite charities.
- Take your RMD. Taxpayers age 70½ must take their annual required minimum distribution by Dec. 31 or face seriously costly penalties. If you're older but don't need the required retirement account withdrawal to cover daily expenses, consider donating the RMD amount to your favorite charity. You won't get a deduction, but you'll do (and feel!) good and avoid any IRS penalties for not taking your RMD.
- Defer income. If deductions aren't a big issue for you, you're in better shape as far as tax reform planning. But what you do want to focus on is income. If it looks like the proposed changes will put you in a lower tax bracket in 2018, defer as much end-of-year income as you can. By pushing it into 2018, your tax bill should be smaller when you file your first return under tax reform.
NEW TAX LAW: You can get a look at the new tax rates for 2018 in my first overview of the bill's highlights and also in my updated post on inflation's affect on 2018 tax rates and brackets.
- Cash in investment winners and losers. Capital gains rates appear to be safe from any tax changes, but you shouldn't let, as the old saying (or cliché, as my editors would say) the tax tail wag the dog. If you want or need the investment earnings now, sell while the market price is high. Or sell and rebuy an asset to reset its basis. And then offset those gains by also dumping any assets that have tanked.
More year-end tax moves: The 10 tax moves suggested above are just some tax things to think about as 2017 winds down.
UPDATE, Dec. 26: Also, today I posted seven more tax moves to consider in light of the new law.
You'll also find more December Tax Moves to make before or by Dec. 31 in the ol' blog's right column. They're in the calendar listing right under the bright red heading of the same name, just below the countdown clock ticking off the time left here in tax year 2017.
Check them out and take advantage of those that fit your financial and tax situations. They could provide you some nice holiday tax presents, as well as give you much to celebrate on New Year's Tax Eve.
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