Note on Tax Reform and Year-End Planning

We sent the following note to clients last week...

Many clients are curious about tax reform planning tips for the final days of 2017.

Before we pass along a few suggestions, note that we are not tax experts. Since every person’s situation is unique, consult your tax professional before making any moves, particularly if you pay the Alternative Minimum Tax (AMT), which generally affects high income earners.

The tips below respond to coming rule changes on deductions. In 2018, the standard deduction will increase to $12,000 for single filers and $24,000 for married couples filing jointly. There will be a cap of $10,000 on deductions for state, local, and property taxes. As a result, many filers who have previously itemized deductions may instead take the standard deduction in 2018.

Filers who itemize in 2017 but will take the standard deduction in 2018 can benefit by making tax-deductible outlays at the end of 2017. Here are a few ideas:

·         Charitable contributions. Tax reform does not affect the deductibility of contributions, just the likelihood that a filer will itemize and take the deduction. Consider making planned contributions before year end to receive a 2017 deduction.

In the future, it may make sense to lump contributions in a single year. One vehicle to do so is a donor advised fund (DAF), which we can help you open at Schwab ($5,000 minimum). Through a DAF contribution, you receive a present-year deduction and can wait until future years to direct funds to the charities of your choice. Rather than cash, you can donate appreciated investments such as stock. You earn a deduction on the value of the stock and avoid capital gains taxes on the appreciation.  

 ·         State and Local Income Taxes. Especially for California residents, the $10,000 cap may significantly limit 2018 deductions. If you pay taxes through quarterly estimates and are not subject to AMT in 2017, then you may want to pay remaining 2017 state tax liabilities, including Q4 estimates, by end of the year.

 ·         Property Taxes. While you cannot pre-pay 2018 income taxes, you may be able to pay 2018 property taxes this year. Generally, you can pay 2018 property taxes that have already been billed. Similar to state taxes, this strategy makes sense if you will hit the $10,000 cap next year and do not expect to be subject to AMT in 2017. 

Tax reform will generate other planning opportunities that we will address next year. We look forward to working with you and your tax professional to help navigate the new laws.

Until then, we hope everyone has a happy and healthy holidays!