As the year-end approaches, you may want to consider steps to reduce your federal income tax bill, especially as Congress weighs tax reform. The current proposals would reduce income tax rates for most businesses and individuals, and increase the available business deductions. Whether or not the proposed tax reforms become law, the following tax tips should help you save on federal income taxes.
Tips for Business Owners: Expensing and Depreciation
Businesses making large equipment purchases should watch carefully as more tax plan details emerge, to maximize the available depreciation deductions.
- Currently, section 179 depreciable property placed in service before year-end may be fully expensed up to $510,000, reduced dollar for dollar by the amount of section 179 property in excess of $2,030,000.
- For new depreciable property placed in service before year-end, the amount not immediately expensable may qualify for a first year “bonus” depreciation of 50%. The first year bonus depreciation allowance declines to 40% next year.
- The proposed tax reform plan may be even more generous: the current proposals contemplate immediate expensing of all depreciable assets (other than buildings), with no set dollar limit, purchased after September 27, 2017, although these proposals are subject to change.
Tips for Individuals
When possible, you should generally defer income and accelerate deductions to reduce your current taxable income. Both techniques will lower your tax bill next April. Even one day can make a big difference.
- Tax on income earned on through December 31 of this year is generally due next April 15, while tax on income deferred until January 1, 2018 is not due until April 15, 2019. Defer income even one day and you may postpone the tax due date for an entire year.
- Even if you receive regular weekly or monthly paychecks you may be able to defer some income. For example, unless you have a vested right to the current receipt of a year-end bonus, deferring the bonus until early 2018 will reduce your current income tax bill. If Congress reduces tax rates beginning with 2018, you may get extra tax savings: less taxable income this year, and a lower tax rate next year on the deferred bonus.
- Deductions should generally be accelerated to lower your current income. Here, too, even one day matters. Deductions you can take this year may reduce your tax bill next April. Those same deductions taken on January 1, 2018, will not reduce your tax bill until April 15, 2019.
Bundle Deductions Together
To help pay for lower rates, the proposed tax reforms reduce or eliminates many common deductions starting next year.
- If you bundle your deductions together this year, you may reduce your current taxable income as well as use deductions that may be reduced or eliminated next year.
- Even without tax reform, bundling your itemized deductions together may allow you to use deductions – including child tax credits, higher education tax credits and deductions for student loan interest – that are phased out at higher levels of adjusted gross income.
- Consider paying deductible expenses with a credit card this year. Paying deductible expenses this year allows you the deductions this year, even if you don’t pay the credit card until January.
Avoid “Net Investment Income” (NII) Surtax Imposed on High Earners
- You may be subject to the 3.8% NII surtax if you have modified adjusted gross income (MAGI) income above certain thresholds: $200,000 if you’re single, $250,000 if you’re married filing jointly, or $125,000 if you’re married filing separately. The 3.8% surtax is due on the lesser of your net investment income or the portion of your MAGI that exceeds the threshold levels. If you reduce your NII or MAGI this year, you may reduce or eliminate your NII surtax.
- One way to reduce your NII is to sell stock market losers, even if you want to hold those stocks long term. Sell stock market losers before year-end, and take the loss to reduce your 2017 MAGI and your NII. You can repurchase those same stocks without penalty, if you wait at least 31days from the loss sale date to do so.
Max Out Health Savings Accounts
- There is still time to contribute the maximum amount to your Health Savings Account (HSA). HSA contributions are tax deductible and the account balance can be used to pay current medical expenses or even left to grow tax free until retirement. The maximum contribution for 2017 is $3,400 for an individual and $6,750 for a family. If you are 55 or over by year-end, you can also make a “catch-up” contribution of $1,000.
- If you were impacted by Hurricane Harvey, Irma or Maria, you may be entitled to special tax relief. The IRS has relaxed the rules for deducting casualty losses, for example, as well has making it easier to access retirement funds. Further, you may make qualifying charitable contributions related to the Hurricane Harvey, Irma or Maria disaster relief efforts that are not subject to the usual charitable deduction limitations.
Individualized Tax Planning
You may not be able to use every technique outlined here. Depending upon your individual circumstances you may benefit from other tax planning strategies. The most important tip is to be aware of the issues at stake, and take advantage of techniques that benefit you.
If you would like to discuss year-end tax planning as it applies to your particular circumstances, I may be reached at firstname.lastname@example.org or by phone at 239-344-1183.