As I write this in early December 2017, it’s almost a sure thing there will be a giant new federal tax law effective for 2018. We don’t know exactly what will be in that new law—but I do know a few important things that taxpayers can do before the end of 2017 in anticipation of the changes. Why take a chance on what might be in the law? Because if the following likely tax-law changes are made, the moves I describe below could save you plenty of money…and if these changes aren’t made, none of these moves are likely to cost you anything significant.
Or put another way, heads you win…tails you don’t lose…
The standard deduction. This is proposed to be increased while the deductions for personal exemptions are eliminated—a combination that will make the increase in the standard deduction not much of a benefit for many middle-income taxpayers. For those with total deductible expenses under the $24,000 proposed amount, they will lose the specific tax benefit of these expenses in favor of the increased standard deduction. This affects people with medical, interest, state tax, charity and miscellaneous itemized deductions. Here’s what I suggest: Review your situation and pay as many of these expenses prior to the end of the year as you can to capture the tax benefit this year rather than taking the risk of losing it next year.
Charitable donations. One way to maximize deductibility is to make next year’s planned charitable donations by December 31 of this year. You can either send them directly to your charitable organizations (designate the payments as being for 2018 so the organizations know not to solicit you during 2018)…or open a donor-advised fund and make the contributions to that fund in 2017. All such contributions will be deductible this year, and you could instruct the donor-advised fund where to distribute the money in 2018 or succeeding years. Most brokerages and community foundations offer easy-to-open donor advised funds. You can even contribute appreciated securities and get a full tax deduction while not having to recognize the income.
Merchandise to charity. If you have clothing, books, furniture and/or other household items you are planning to give to a charity “someday,” make that someday today. Donate such items this year and be assured of getting a full deduction—versus next year when you might not be able to get a full tax benefit because of an increased standard deduction.
Select specific stock shares you want to sell. If you are planning to sell some stock next year for whatever reason, and you have high-basis and low-basis shares in such stock (meaning you paid a lot more for some of your shares than for others), consider selling the high-basis shares this year. Reason: Up to now, individual investors have been allowed to minimize their capital gains taxes by designating which shares of a specific stock they are selling (by designating their highest-basis/highest-cost shares, the resulting gain and tax would be lower). But it’s likely that under the new tax law, the first in-first out (“FIFO”) rule will become the designated way to select the cost basis of shares you sell. You will have to use the basis of your earliest-acquired (“first in”) shares, which is usually the lowest cost basis you have and which results in a higher taxed gain.
Prepay part of your 2018 real estate taxes and state and local income taxes. The new tax law will likely limit to $10,000 the amount of real estate tax that individuals can deduct. If your real estate taxes are above that proposed allowable amount (or above a different probable amount if you see in the news that the proposal has changed), prepay the first quarter or first and second quarter tax in December and get a deduction this year. Note that the alternative minimum tax might limit some of this deduction for 2017, but under the likely new law you won’t get any deduction beyond whatever limit is set, so you might as well try to get the deduction this year. The same applies to your state and local income taxes. (A typical way to pay these in advance would be to pay amounts as estimated tax in 2017 and later claim a refund to be applied to 2018 tax.)
Medical bills. Clean up all past-due medical bills to try to get the deduction for those costs.
Mortgage interest deduction. If you will be affected by the proposed limit on mortgage interest deductibility, consider prepaying your January mortgage payment (note that you cannot prepay interest, so I suggest prepaying only the first payment due in 2018). Also consider starting to accelerate the paydown of the mortgage since its tax advantage will be lessened.
IRA Conversions. The new tax law is likely to eliminate the option of recharacterizing Roth IRA conversions back into to traditional IRAs. (It will probably also eliminate conversions of IRAs into Roth IRAs, for that matter.) If you think you might want to do either, consider doing it before Dec 31. The new law will also probably toughen up the rules for hardship distributions from IRAs. If you are in this situation, consider distributions before December 31.
The deduction for autos used in your business will likely increase next year—one proposal has the first-year write-off increasing from $3,160 to $10,000—so consider holding off a planned purchase of a new business vehicle until January or later.
For equipment-heavy businesses that have 2017 purchases over the bonus depreciation limit, hold off placing any additional equipment into service until next year, when the limits are likely to be increased substantially. If you haven’t reached the limit, then you may want to place the equipment into service by year-end 2017 to get the bonus depreciation as soon as possible.
Important logistical notes: The last business day of 2017 will be Friday, December 29, but electronic transactions pertaining to the tax year can be done until midnight December 31. If you think it looks like the President is going to sign a big new tax law into effect with enough time to spare before the end of 2017, you can wait until he does sign it to make some or most of the moves above. In the meantime, because everyone’s situation is different, it would be prudent to check with your own tax advisor to see how you would be impacted by these strategies.