2017 year-end planning is complicated because of tax changes expected to occur under the Trump Administration. Congress is expected to make final decisions by Christmas. Here are 12 moves to keep your finances healthy and prepare for possible changes.
1. Review itemized deductions: The main theme for 2017 year-end planning for the nearly one-third of taxpayers who itemize their deductions is clear: This could be the last year that you will be able to deduct state and local taxes (SALT), medical and dental deductions (must exceed 10 percent of AGI for those under age 65, 7.5 percent for those above); and miscellaneous deductions, like the write-off of tax-prep fees, job-hunting and business car expenses, and professional dues, if they totaled more than two percent of AGI. The deduction on property taxes could be limited to under $10,000. The deduction on interest on mortgage debt above $500,000 is also slated to go away next year.
2. Bunch itemized deductions. Many expenses can be deducted only if they exceed a certain percentage of your adjusted gross income (AGI). So try to bunch legal advice and tax planning, travel and vehicle costs into 2017 so you exceed the 2 percent floor.
3. Use highly appreciated securities for charitable contributions. If you itemize deductions, you'll write off the current market value (not just what you paid for them) and escape taxes on the accumulated gains.
4. Sell losers in taxable accounts. If you have investment losses in a taxable account, you can sell them to offset gains from this year. If you have more losses than gains, you can deduct up to $3,000 against ordinary income; and if you have more than $3,000, you can carry over that amount to future years. If you’re going to sell something and replace it within 30 days, the new asset can’t be “substantially identical,” which is known as the wash sale rule. Avoid it by waiting 31 days and repurchase what you sold, or replace it with something that’s close, but not the same as the one you sold. A tax reform that could go into effect next year forces investors to sell stocks on a first-in, first-out basis, which could reduce your tax savings with this strategy next year.
5. Consider pushing income into 2018, especially if you are self-employed. Some people may benefit from lower tax brackets. People who receive income through S corporations and partnerships will see lower taxes next year.
6. Use your gift tax exclusion. You can give up to $14,000 to as many people as you wish in 2017, free of gift or estate tax. If you combine gifts with a spouse, you can give up to $28,000. You can also make unlimited payments directly to medical providers or educational institutions on behalf of others without incurring a taxable gift or dipping into your lifetime gift-tax exemption.
7. Fully fund college savings 529 plans. You can invest up to $14,000 in 2017, tax-free, without incurring a federal gift tax, and many states offer state tax deductions for the contributions.
8. Fully fund employer-sponsored retirement plan contributions. The deadline for funding 401(k), 403(b) or 457 plans is Dec. 31. If you are not maxed out yet, you may be able to bump up your contribution on 2017’s last paychecks. The limit is $18,000, plus an additional $6,000, if you are over 50.
9. Consider converting a traditional IRA into a Roth IRA. A conversion requires that you pay the tax due on your retirement assets now instead of in the future. Whether or not a conversion makes sense for you depends on factors including whether or not you can pay the tax due with non-retirement funds.
10. Take Required Minimum Distributions (RMD). Uncle Sam requires that you withdraw money from retirement accounts after you turn 70 ½. (IRS rules are complicated, so please consult IRS.gov for more specifics.) RMD withdrawals must occur by Dec. 31st and failure to make the withdrawals results in a whopping 50 percent penalty on the amount you should have withdrawn. If you have multiple individual retirement accounts, you only need to take one RMD based on your age and the total value of the accounts. BUT, if you also have a 401(k) or 403(b), you need to take the RMD from each account individually.
11. Consider a Qualified Charitable Distribution (QCD). This technique allows you to sidestep the tax on your RMD by making a gift up to $100,000 directly from your IRA to a charity. If you use it, you swap having to claim the income for making a charitable deduction.
12. Open a small business retirement account. If you open a qualified retirement account by Dec. 31, you have until the day you file your taxes next year, including extensions, to make this year's contribution. One plan to consider is the solo or one-participant 401(k) plan, which allows total contributions of up to $54,000 for 2017.
As changes to the tax code loom, it’s particularly important to make the right decisions about your year-end financial moves. A CFP® professional will give you the latest information and help you make the right decisions.