Act Fast to Lower Your 2017 Tax Bill
11 end-of-year strategies to help you save ahead of the new tax laws
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Time is running short, but there are still things you can do in 2017 to lower your tax burden before new laws are in place.
UPDATE: This article has been revised to include an IRS statement on property taxes.
Alert: You have only until the stroke of midnight, Jan. 1, before the new federal tax law takes effect.
For some older Americans, that presents an immediate opportunity — for their 2017 taxes. The reason: With the new tax law, higher standard deductions kick in, meaning fewer reasons to itemize your deductions come 2018’s tax return. For people who will no longer itemize after this year, it might make good financial sense to take quick advantage of tax breaks or deductions that will change or disappear come the new year. Plus lower tax rates for next year could help you save this year as well, if you move fast.
Here are 11 ways to capitalize on these immediate opportunities, according to tax professionals and financial advisers. But remember: you only have a few days to take action. So don’t delay!
Defer income
Because household tax rates are heading lower, you’ll pay less taxes on bonuses and other income earned in 2017, but paid to you next year. If you’re set to receive either before year end, ask your employer to defer pay into 2018, says St. Louis-based CPA Mike Piper. And if you’re self-employed and still have outstanding income due this year, you may want to hold off billing until lower rates kick in next year, Piper says.
Pay off 2017 property taxes (and 2018’s if you can)
Starting next year, homeowners will only be allowed to deduct a maximum of $10,000 in combined property taxes and state and local taxes. The new tax code prohibits filers from gaming the system by prepaying 2018 state or local taxes this year. But you can pay off any remaining 2017 property taxes — fully deductible this year — that may not have a due date until 2018. You also might be able to prepay at least a portion of 2018 property taxes. Late Wednesday, the Internal Revenue Service issued an advisory saying prepayments of 2018 property taxes that had already been assessed would be deductible for 2017, but prepayments of estimated 2018 property taxes would not be deductible in 2017.
Make your January mortgage payment
If you itemize your deductions now, but might not next year, you can deduct an extra month of mortgage interest on your 2017 return by making payment a few days early.
Make 2018 charitable contributions
For those who continue to itemize, charitable deductions will still be tax deductible in 2018. But for those who will be using the higher standard deductions — $12,000 for individuals and $24,000 for married couples filing jointly — rather than itemizing, it makes sense to prepay 2018 charitable contributions and even later years by year’s end, says Eric Bronnenkant, head of tax at online investment firm Betterment. Some brokerages also offer donor-advised funds, which allow you to make a tax-deductible investment this year into a fund, and then use that cash to make charitable grants in later years.
Check your medical expenses
The new tax law supports an AARP-backed initiative allowing filers to deduct medical and health expenses that exceed 7.5 percent of income in 2017 and 2018. “You may want to consider accelerating a 2018 medical expense into 2017 if you expect to exceed the 7.5 percent floor this year,’’ says Bronnenkant. “Delaying the medical expense until 2018 could cause you to miss a (2018) tax benefit if medical expenses are below the 7.5 percent floor or due to the increased standard deduction.” Potential purchases range from medical supplies to paying off outstanding doctor’s bills.
Pay off your estimated quarterly taxes
If you’re in business for yourself, the Internal Revenue Service usually requires you to make quarterly estimated tax payments based on your expected income, taxes and deductions. September-December quarterly payments are due by Jan. 15. But if you pay before year’s end, you can deduct the taxes in 2017. “Say you owe $10,000 in New York, where I live,’’ says certified public accountant Anil Melwani. “You could save thousands by paying your estimated taxes now instead of waiting until next year.”
Pay off your home equity loan
Interest on home equity loans will no longer be deductible after 2017, so it may be worthwhile to prepay this year.
Accelerate business expenses
Currently, you can deduct unreimbursed expenses on everything from subscriptions to personal computers if they add up to more than 2 percent of adjusted gross income. So if you’re thinking about buying a new PC or other purchases early next year, make them before year’s end. Those can include multiyear subscriptions to professional journals or publications you need for work.
Max out your 401(k)
This is a prudent retirement move regardless of your tax situation, since pretax contributions reduce your taxable income. 401(k) accounts are especially good for workers 50 and older, who can sock away up to $24,000, compared with $18,000 for younger workers.
Sell your market losers
You can take up to $3,000 in capital losses on investments such as stocks and mutual funds. That won’t change under the new tax bill, but it will provide you another tax break in 2017.
Try talking with your accountant
With fewer tax breaks available beginning in 2018, a tax professional can help you sort out the value of your deductions and make sure you make the right moves to ensure that they exceed the new standard deductions. Many are inundated already with year-end calls, so you might not get much time. But even a 15-minute phone call this week could help you make the right moves.
“Aside from end-of-year planning, it’s worthwhile to look over your financial future,’’ says Piper, whose authored several personal finance books and runs the online Oblivious Investor blog. “Without out a doubt, this is the biggest change to taxes in decades. It’s important to evaluate everything.”