CHICAGO — As 2017 draws to a close, an uncertain tax and legislative environment means that year-end tax planning is more important than usual. The possibility of major tax reform in the next several months opens up powerful planning opportunities that can save on tax if completed before year’s end.
To help individuals and businesses prepare for filing season, Grant Thornton LLP has released a collection of Year-End Tax Guides for 2017
“The potential for tax reform makes year-end tax planning more important than ever for individuals and public and private companies,” said Dustin Stamper
, director in Grant Thornton’s Washington National Tax Office. “Tax filers should look for ways to accelerate deductions into 2017 while rates are high, and defer income into future years when rates might be lower.”
Stamper stressed that the potential to lose deductions or tax incentives as part of tax reform should also factor into year-end planning. “It’s important to remember that good tax planning goes beyond what has happened. You also have to account for what may happen in the months to come.”
Here are 10 of the most important 2017 tax planning considerations for individuals:
- Accelerate deductions and defer income. Deferring tax is usually a good strategy simply for the time value of money. This year it’s even more important. You want to use deductions now while rates are higher and defer income into future years when rates might be lower. There are plenty of income items and expenses you may be able to control. Consider deferring bonuses, consulting income or self-employment income. On the deduction side, you may be able to accelerate state and local income taxes, interest payments and real estate taxes.
- Use itemized deductions before they’re gone. Tax reform threatens many itemized deductions, including the deductions for state and local taxes and medical expenses. If possible, consider paying expenses now while you can still use the deduction. You can often prepay 2017 state taxes even if they aren’t due until next year. Taxpayers can also often control the timing of costly non-urgent medical procedures. But remember some expenses can’t be deducted unless they exceed a certain percentage of your adjusted gross income (AGI). Medical expenses generally can’t be deducted unless they exceed 10 percent of AGI (7.5 percent for taxpayers age 65 and older).
- Leverage state and local sales tax deduction. If you are deducting state and local taxes, remember that you can elect to deduct state and local sales tax instead of state income taxes. This is valuable if you live in a state without an income tax, but can also provide a bigger deduction in other states if you made big purchases subject to sales tax (like a car, boat, home, or all three). The IRS has a table allowing you to claim a standard sales tax deduction so you don’t have to save all of your receipts during the year. This table is based on your income, family size and the local sales tax rate, and you can add the tax from large purchases on top of the standard amount. If you already know you will make this election for 2017, consider making any planned large purchases before the end of the year in case the election is unavailable or doesn’t make sense next year.
- Consider charitable deductions now. The charitable deduction deserves special consideration because you have complete control over its timing. Lawmakers have promised to retain it as part of tax reform, but they could still apply limits. Even if it is left untouched, it might not be valuable next year for many taxpayers. Lawmakers are proposing to double the standard deduction, meaning fewer taxpayers will itemize deductions in the future. If you don’t itemize deductions, you can’t deduct charitable gifts. Consider accelerating gifts into this year. Also, the deduction may be more valuable against today’s higher rates; however you must be careful because there are AGI limits on deductions.
- Get your charitable house in order. If you do plan on giving to charity before the end of the year, remember that a cash contribution must be documented to be deductible. If you claim a charitable deduction of more than $500 in donated property, you must attach Form 8283. If you are claiming a deduction of $250 or more for a car donation, you will need a contemporaneous written acknowledgement from the charity that includes a description of the car. Remember, you cannot deduct donations to individuals, social clubs, political groups or foreign organizations.
- Make up a tax shortfall with increased withholding. Don’t forget that taxes are due throughout the year. Check your withholding and estimated tax payments now while you have time to fix a problem. If you’re in danger of an underpayment penalty, try to make up the shortfall by increasing withholding on your salary or bonuses. A bigger estimated tax payment can leave you exposed to penalties for previous quarters, while withholding is considered to have been paid ratably throughout the year.
- Leverage retirement account tax savings. It’s not too late to increase contributions to a retirement account. Traditional retirement accounts like a 401(k) or individual retirement accounts (IRAs) still offer some of the best tax savings. Contributions reduce taxable income at the time that you make them, and you don’t pay taxes until you take the money out at retirement. The 2017 contribution limits are $18,000 for a 401(k) and $5,500 for an IRA (not including catch-up contributions for those 50 years of age and older).
- Document your business activities. You may not need to pay a 3.8 percent Medicare tax on your business income if you participate enough in your business that you are not considered a “passive investor.” Participation is defined as any work performed in a business as an owner, manager or employee as long as it is not an investor activity. Even so, you must document your activities, and the IRS will not let you make ballpark estimates after the fact. Make sure you document the hours you’re spending with calendar and appointment books, emails and narrative summaries.
- Take a closer look at your state residency status. For individuals who split their time in two different states throughout the year, now is an excellent time to consider where you may be taxed as a resident for 2017. To make it more likely that the high-tax jurisdiction will respect the move and not continue to tax you as a resident, you should track the number of days you are spending in each jurisdiction. Generally, if you reside in a state for 183 days or more, that state will assert residency and the ability to tax all of your income. Furthermore, if you move to a new state but you maintain significant contacts with the old state (including driver’s license, residences, bank accounts and the like), you could run the risk of being taxed as a resident in the old state.
- Tread carefully with estate planning. Normally, you want to make sure you don’t waste your annual $14,000 gift exclusion. This means making gifts to heirs before the year ends. The possibility of estate tax repeal makes planning a little more complicated this year. It still makes sense to use your exclusion amounts because the estate tax may not be repealed after all and there is no tax cost to using the exclusion even if it is. But you may want to avoid using giving strategies that actually involve paying gift tax until after the legislative outlook is resolved.
For additional tax planning tips for privately held businesses and public businesses, visit Grant Thornton’s Year-End Tax Guides for 2017
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