Tax Reform Calls for Year-End Strategy

As the pending Tax Cuts and Jobs Act heads toward House and Senate votes early this week, it is important to consider certain year-end tax strategies. This year, more than ever, making the right moves by deferring or accelerating certain income and expenses could have immediate impacts on your tax liability. Below are five notable changes in the bill, and how you can play them before the year is out:

1. Itemized Deductions – One of the biggest changes in the bill are the limits on certain current itemized deductions, while the standard deduction nearly doubles. Consider prepaying applicable expenses in 2017 so you can bundle your itemized deductions together in one year, especially if you think you may use the standard deduction in the future. It’s important to keep the AMT in mind here –taxpayers may not see any benefit of increasing certain of their itemized deductions if they’re in the AMT. Below are a few of the most common itemized deductions and potential strategies:

  • State and Local Taxes – The bill allows only $10,000 of state and local taxes to be deductible (including unpaid property taxes) – which may cause a large drop in your itemized deductions moving forward. Individuals may want to consider paying balances they may have due on their 2017 state and local income taxes before year-end, instead of in April. It should be noted that only 2017 taxes paid can be deducted – prepaid future taxes won’t be deductible.
  • Charity – While charitable contributions are generally limited to 50 percent of adjusted gross income, you can carry over to next year — and up to five years — any amount that exceeds the limit. If there are amounts you generally give on an annual basis, you may want to consider prepaying your future contributions before year-end.
  • Home Equity Loan Interest – If you have a home equity loan, the interest might not be deductible next year. As such, you may want to think about paying off what you can now, and moving those types of debt up the priority list if you are repaying multiple loans.
  • Mortgage Interest Deduction – The current rule allows taxpayers to deduct interest payments on up to two mortgages worth a combined $1 million. The new bill lowers the cap to $750,000. So, if are planning on purchasing a home, keeping your mortgage below $750,000 could be beneficial.
  • Medical Expenses – Have you been putting off paying for those expensive prescriptions, or making the trip to the orthodontist for you or your child? You may want to take care of as much of your medical expenses as possible before the end of the year.

2. Moving Expense Deduction – The rule allowing taxpayers to deduct the cost of moving if the move is due to starting a new job or relocating an existing job is going away (except for members of the military). So, if you can foresee future expenses in a pending move, it may be prudent to incur them this year.

3. Pass-through Income – Pass-through businesses may be able to use a new 20% deduction for the first $315,000 of income, starting in 2018. It may be beneficial to defer pass-through income as much as possible, so you can take advantage of potential such deductions, or lower rates for pass-through entities, in the future.

A sweeping tax reform package such as this one has so much in it that a blog post simply can’t cover all the changes in play. The above was hopefully a helpful primer on some of the biggest changes and how they might affect your personal tax strategy, especially as we near year-end. Of course, you should review anything you might consider with your tax advisor before moving forward, or feel free to give us a call. We’d love to help.