It looks like we will have some version of a tax reform package before the end of this month to be effective on January 1, 2018. No one can be certain what the exact terms will be, but we have enough information to make a few assumptions. What steps can you take before December 31 to reduce your income tax liability?
Tax-deferred contributions: Have you maxed out all your opportunities to contribute pre-tax to your investments in 2017? IRA and ROTH IRA contributions can be made up until you file your 2017 income tax return, but salary reduction contributions for 401k and 403b plans must be made before December 31st. The 401k and 403b contribution limit for 2017 is $18,000 and for those ages 50 or over, there is a “catch-up” provision which allows an additional $6,000 to be contributed. Even if your 50th birthday is December 31, 2017 you are eligible to make this extra contribution to your 401k plan in 2017.
After 3 years without an increase, the contribution limits are edging up next year. In 2018 you can contribute an additional $500 per year per taxpayer for a total of $18,500 and $24,500 for those who are 50 and over in 2018.
Health Savings Account (HSA): Are you covered under a high deductible medical insurance plan? The HSA is the best kept secret in retirement planning and the contribution limits are going up in 2018. Individuals can save an additional $50 and the family limit is going up to $6,900. There is also a “catch-up” provision for HSA, and it starts in the year you turn age 55. If you are eligible for an HSA call us for information on how you can integrate this savings opportunity with your retirement planning. There is an unlimited carry forward and this could be a very valuable piece of your retirement plan.
Charitable Donations: 2017 is the year to maximize your charitable giving. You could benefit from giving your 2018 gifts before December 31, 2017. With the standard deduction going up to $24,000 for a married couple, many taxpayers will use the standard deduction instead of itemizing in 2018. If you give before December 31st you could itemize and benefit from your generosity on your 2017 tax return, and still take the new higher standard deduction in 2018.
Also the Qualified Charitable Deduction for those who are 70 ½ and older will become even more valuable with a higher standard deduction. Call us for details on this tax saving strategy.
There is still time to give shares of highly appreciated stock to your favorite charity and receive a tax benefit in 2017.
State Tax Deduction: It looks like we may lose the state income tax deduction in 2018. You will benefit if you pay all the state income tax you expect to owe for 2017 before December 31st. If you think you have not withheld an amount sufficient to cover state taxes, send a check before December 31st so you can deduct this on your 2017 income tax return. It may not be deductible if paid in 2018. Even if it is, the higher standard deduction could mean you no longer itemize so either way, paying in 2017 makes good sense.
Property Tax Deduction: This deduction probably will not go away entirely but it may be capped. However, with a higher standard deduction you could benefit from prepaying your 2018 property taxes before the end of 2017. Check with your municipality to see if they will accept property tax payments in advance. If you pay in December, you could itemize this year and perhaps take the deduction on your 2017 tax return and then take the new higher standard deduction in 2018.
Mortgage Interest Deduction: If you pay your January mortgage payment before the end of December, the interest deduction should count on your 2017 income tax return. Check with your lender to see if there is any restriction on paying the payment a few weeks early and make sure it is an interest payment, not a principal payment.
Home Equity Line of Credit: These loans are very popular and one draw is the tax deductibility of the interest up to $100,000 of debt. This interest may not be deductible under the tax reform bill. Without deductible loan interest, you likely will want to pay it down as soon as possible.
As always, check with your accountant before implementing any tax strategies. Be careful not to trigger the Alternative Minimum Tax (AMT) in any strategies that pull tax deductions into 2017. That could cause you to lose the deduction in which case you might was well wait and pay in 2018.