As you’re probably aware, legislators in Washington are in the process of trying to pass a major tax reform bill. Given the current uncertainty about tax reform, you might think there’s not much you can do right now to lower your 2017 tax bill.
Think again. Regardless of what kind of tax reform legislation (if any) eventually becomes law, there are still some year-end tax moves you can make right now.
Defer Income, Accelerate Expenses
The classic year-end tax planning strategy is to defer income into the following year while accelerating deductible expenses into the current year. Doing so will lower your taxable income this year, which in turn could lower the amount of tax you owe in 2017.
In effect, this strategy delays the payment of tax for one year by pushing income into the following year. The strategy might make even more sense this year given the possibility that tax reform could lead to lower tax rates in the future.
One way to defer income is to request that any year-end bonuses be paid after December 31 — like during the first week of January, for example. If you own a business or are self-employed, meanwhile, consider waiting until the first week of January to send invoices to your customers.
On the flip side, you can possibly increase your deductions for this year by pre-paying 2018 property taxes or making additional contributions to your IRA or 401(k). The 2017 contribution limit for traditional IRAs is $5,500 (or $6,500 if you’re 50 years of age or over), while the 2017 contribution limit for 401(k)s is $18,000 (or $24,000 if you’re 50 years of age or over).
“Harvest” Some Tax Losses
A strategy known as tax-loss harvesting involves selling underperforming investment securities before the end of the year in order to realize losses. These losses can then be used to offset taxable gains you’ve realized in other investments, as well as a portion of ordinary taxable income.
Investment losses can be used to offset capital gains on a dollar-for-dollar basis. If you haven’t realized any taxable gains this year, you can carry losses forward indefinitely to offset capital gains in the future. Tax loss harvesting may play a role in year-end portfolio rebalancing as you strategically buy and sell investments in an effort to bring your asset allocation back in line with your investment objectives.
Make Charitable Contributions
During this time of year, many people want to help those who are less fortunate by making donations to charitable organizations. Doing so is not only a good way to help others who are in need, but it can also help you save money on your tax bill.
Contributions to qualified charities — also known as 501(c)(3) organizations — are tax-deductible during the year they’re made if you itemize deductions on your federal income tax return. This goes for cash contributions as well as donations of items such as clothing, furniture and vehicles.
One way to get even more tax bang out of your charitable gifts is to donate appreciated assets (like investment securities) to charities instead of cash. This way, the charity will receive the full value of your donation since neither you nor the charity will have to pay capital gains taxes on appreciation in the security’s value. You can then invest the cash you would have donated in other securities.
Business Tax-Planning Strategies
If you own a business, here are a few business-related year-end tax planning tips to consider:
- Write off bad debt. If you have uncollected accounts receivable that you’re not likely to collect, consider writing them off now as bad debt expenses. If you collect the money next year, you’ll count it as revenue in 2018.
- Look at targeted business tax breaks. These might include the Research and Development (R&D) tax credit, the Work Opportunity Tax Credit (WOTC) and the Domestic Production Activities Deduction (DPAD).
- Deduct use of a home office. If a specific area of your home is used regularly and exclusively for business, you might be able to claim the home office deduction. The deduction is equal to $5 per square foot of your qualifying home office area, up to 300 square feet.
Remember: Time is of the essence when it comes to making year-end tax moves. The window on year-end tax planning strategies slams shut after December 31.
Please contact us if you have more questions about these and other year-end tax planning strategies.