The end of 2017 is fast approaching. It has been a challenging year. Congress has spent much of its agenda focusing on failed healthcare bills, and at this point it has yet to pass any significant tax legislation. We may need to approach year-end tax planning as if no bill will be passed. Now is a good time to think about maneuvers which can lower your tax bill.
Year-End Tax Planning Considerations for Individuals
- You can harvest losses on stock portfolios while substantially preserving your investment position. For example, you can sell the original stock holding, and then buy back the same security at least 31 days later to establish a new cost basis. With low transaction costs, it is a good idea to harvest stock losses annually.
- Review your sources of income to determine if you should postpone income until 2018 and accelerate deductions into 2017. Proper management of income and deductions can have significant impact on tax brackets, allowable credits and other deductions.
- Consider using a credit card to pay deductible expenses before the end of the year. Doing so will increase your 2017 deductions even if you don’t pay your credit card bill until after the end of the year.
- If you are over age 70½, consider a direct transfer to charities from your IRA in lieu of taking income from a required minimum distribution (RMD).
- If possible, utilize lower marginal tax brackets to convert a traditional IRA to a Roth IRA. If you have already converted into Roth IRAs, re-examine current taxable income to determine if re-characterization of the original conversion makes economic sense.
- If you become eligible on or before December of 2017 to make health savings account (HSA) contributions, you can make a full year’s worth of deductible HSA contributions in 2017.
- For ranchers, review drought declarations which provide opportunities to defer sales of breeding and non-breeding livestock. Extension of the replacement period on breeding livestock is also affected by current drought declarations.
- Consider bunching itemized deductions into 2017. With the potential for tax changes down the road, it may be better to take advantage of the current rules in 2017. This would include, for example, making your 2018 charitable donations in December of 2017.
- Make sure you have maximized your retirement contributions, as this remains the greatest “loophole” in today’s tax law.
Year-End Tax Planning Considerations for Businesses
- Accelerate business expenses into 2017 to take advantage of possible lower tax rates under the proposed tax legislation.
- Consider the availability of the deduction for equipment purchased up to $510,000 (Section 179), and the availability of 50% bonus deduction for new equipment
- Congress created “qualified improvement property,” a class for new nonresidential interior real property now eligible for bonus depreciation. Unlike qualified leasehold property, these improvements do not need to be made pursuant to a lease and do not have to be made to a building more than three years old.
- Review retirement plans to determine possible need for amendments to comply with current employment regulations.
- Review form 1099 filing requirements to ensure filing of forms with the Internal Revenue Service before January 31, 2018, to avoid late filing penalties.
- Review of Affordable Care Act requirements to provide health insurance to employees and possible form 1095 filing requirements.
Estate and Gift Tax Considerations
- The estate filing exemption for 2017 is $5,490,000 per person. Estates in excess of the applicable exclusion are taxed at a rate of 40%.
- Make gifts utilizing the annual gift exclusion of $14,000 per person per year to potentially save on gift and estate taxes.
- Portability of the unused exemption is an option available at death of first married spouse.
- Consider Charitable Lead Trusts in this low interest environment.
Higher-income earners have unique concerns to address when mapping out year-end plans. Be wary of the 3.8% surtax on certain investment income and the additional 0.9% Medicare tax on earned income.
Taking advantage of planning opportunities can provide significant impact on your 2017 tax liability. Make sure you contact your Ketel Thorstenson advisor today to schedule a review of your current tax position.
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