What Tax Reform Could Mean for Your End-of-Year Planning
December 31 is again approaching, and we will want to start considering tax planning for the 2017 year end. Of course, given the uncertainty as to whether Congress passes the House’s tax bill, the Senate’s version, something in-between, or nothing at all (!), the current year end will be a bit more of a moving target.
I found that message in my email box last week. It came, as you might expect, from my trusted accountant. But it could have landed in any of your mailboxes as well. While Washington focuses on the country’s economy, it’s up to each of us to hone in on our own personal economies—with an eye toward making financial moves before December 31 that will lower our tax bills come April. But first, from Jill Schlessinger, Senior CFP Board Ambassador, a cautionary note:
“I have always believed in my heart of hearts that if you want to try to get too cute, you might regret it… We’ve got to be very careful about how we make these choices going forward.”
With that in mind, here’s what you need to do now:
Start at the beginning. The beginning, explains CPA Ed Slott, is where it’s always been—with your tax return from the year before. That’s your road map to deductions and credits that you’ve taken in the past.
Make the most of deductions and credits that may not be available in the future. As you look at your past returns, pay particular attention to capturing benefits that may not be available in the years to come. The deduction for state and local taxes is on the chopping block, for example. Can you afford to pay some of next year’s taxes in this year to capture an even larger deduction? You may want to pre-pay property taxes since they might not be deductible next year, says Slott. If you’re an average worker making $50,000 to $60,000, if you own a home, you could be paying $10,000 to $15,000 in real estate taxes and state income taxes.
“If you don’t get a deduction for that, your taxes could increase by thousands,” he says. Other deductions that could be eliminated include those for medical expenses, moving expenses (even when job-related) and tax prep. Ask your accountant if you can pay them for the 2017 returns now, says Elde Di Re, Partner in EY Tax Private Client Services practice.
Take a look at your charitable giving strategy. One of the changes likely headed our way is an increase in the standard deduction for singles to $12,000 and $24,000 for couples. As in the past, if you take the standard deduction, you don’t itemize (and vice versa). But the increase will likely mean that for some people who have itemized in the past, it will no longer make sense in the future. If you suspect you’re one of them, you may want to give more to charity this year and know you’re getting a benefit.
In fact, if you’re feeling flush, you may want to accelerate your contributions for years to come by putting money into one of the donor-advised funds that financial institutions have established as charities. “Let’s say you usually gave $1,000 to your alma mater, and you think under these new set of rules you’d potentially be taking the standard deduction every year,” says Di Re. You’d write the check now for $5,000 or $10,000, and you’d get a deduction for that amount in 2017—then, over time, distribute the money to your alma mater.
And if you think you’ll continue to itemize? Of course, we would never suggest that you not support your favorite causes. But if you’re looking for added cash to pre-pay some of the front-loaded deductions we noted previously, pushing your gifts into 2018 may make financial sense.
Rethink your debt. One of the biggest potential changes is the deductibility of interest on mortgages. Currently, interest on loans of up to $1,000,000 is deductible, but that could be halved—and the deductibility interest on second-home loans and home equity loans could be wiped away. How do you approach that? Run the numbers. Take a fresh look at your debts and see if it makes sense to pay it off now or quicker. Ask yourself: If I use cash to pay it off, “what was that cash doing for me?” says Di Re.
If it was sitting in a bank account earning a slim 1 percent, paying down your loan may put money back in your pocket. If it’s invested in the market where you’re earning a higher annual return, possibly not. Run the same scenarios on student loans that may lose their interest deductibility.
Heavy up on retirement. Finally, Schlessinger notes, although we had a “freak-out moment” when we worried there would be a limit to saving in retirement accounts, that’s now off the table. You want the biggest bang for your buck on year-end planning? Doubling down on retirement is the way to do it. For your last few paychecks, bump up your retirement contributions. Tell your employer, for example, you want to put in 15 percent for the last few weeks of the year. If you’re putting money into an IRA—Roth, traditional or SEP—you’ve got until the tax filing deadline (without extensions) to sock money away.
You’re saving more for retirement and reducing your tax liability at the same time, she says.
With Hayden Field