State and local taxes

One of the casualties of the new tax reform, starting tax year 2018, is that individuals can only deduct up to $10,000 for any combination of state and local income taxes, property taxes, and sales taxes. The move is widely viewed as a HAMMER to states such as New York, New Jersey, and California. Although prepaying 2018 state and local income taxes cannot be taken as a deduction, prepaying fourth quarter 2017 state and local income taxes this December, including any tax you expect to owe when you file your tax return in April, may still be advisable.

If you have no state income tax deduction in 2017, consider claiming the sales tax deduction. Tracking sales tax paid throughout the year can be very tedious job though; therefore, the other option available is to use calculated formula provided by the IRS to deduct sales tax in 2017. 

Property taxes

Many jurisdictions charge property taxes in multiple installments, with payment due dates often spanning two calendar years. One tax saving strategy could be to prepay the first-half property tax payment of 2018 before the year-end, 2017. However, If you are trying to make property tax payments for the 2018 tax year that haven’t even been determined or billed yet, it’s likely not deductible. If you are one of them who pay property taxes out of escrow, you will have to coordinate with your bank or the mortgage company. Also be careful, if you prepay your 2018 property taxes, you might be giving up any right to contest your property valuation. 

Finally, before you pull the trigger to pay your state and local taxes, make sure you check with your accountant whether you owe the Alternative Minimum Tax (AMT) in 2017, then prepaying your property taxes probably won’t help you because the AMT requires you to add back all of your state and local taxes and recalculate your tax bill, so the benefit of prepaying goes away. 

Home equity loan interest

Prepaying home equity loan interest if possible may be advisable as that deduction will no longer be available next year. In some cases, paying off home equity debt and using the interest tracing rules to establish investment debt might be a more tax effective way to borrow. 

Charitable donations

Do you feel it’s about time to give a little more to your religious or a qualified institution. If so, get it done by year’s end. It helps reduce your income this year when tax rates are higher. Plus, you might not end up itemizing next year since the standard deduction is nearly doubling. 

Miscellaneous itemized deductions

Deductions for miscellaneous itemized deductions subject to the two percent floor (including tax preparation fees, investment expenses, and un-reimbursed business expenses) will all be gone in 2018.Taxpayers who have significant miscellaneous deductions may consider prepaying these expenses. 

Get rid of the losers in your portfolio

Losses on investments are deductible against gains, reducing the amount of tax you’ll pay on winning investments that you’ve sold during the year. To claim your loss, you need to sell the losing stock by December 31, and then make sure not to buy it back within 30 days. Even if you don’t have gains on other investments, up to $3,000 in capital losses is available for offsetting other types of income. 

Delay income until 2018 if possible           

If you are a small-business owner, there is an advantage to delay income until January 2018 when the tax rates are lower, especially. So if you are following some customers or clients to pay the bill sent a while ago, you might want to wait until January 2018. In addition to lower tax rates, small business owners get a generous benefit starting next year of being able to deduct 20 percent of their business income tax-free. How exactly to accomplish this depends on the accounting method that you use in your business and a host of other issues, so make sure to consult your accountant to decide exactly how to implement an income-deferral strategy.

Full fixed asset expensing

100% expensing is allowed for qualified property acquired and placed in service after September 27, 2017, and before January 1, 2023. The “new property” requirement is removed and replaced with a taxpayer’s first-use rule. It appears you can save significant taxes by closing deals before the end of the year, because this is one of the few provisions that is retroactive. 

Max-out your retirement

If you have a 401(k) or other employer-sponsored retirement plan, making sure you contribute maximum amount as possible into your account to cut your taxes. The general maximum you can set aside for most plans is up to $18,000 in wages, with those who are 50 or older getting to save an additional $6,000 if they choose. Unlike IRAs, 401(k) contributions must be completed by December. 31, 2017.

Make sure you’re not going to owe a tax penalty

Last but not least, it’s important to estimate your taxes and make sure that you’ve had enough money withheld to avoid any penalties. The general rule is that if you’ve had at least 100% of your prior-year tax liability withheld, or 90% of what you’ll end up owing this year, you won’t owe a penalty. But other requirements apply to high-income taxpayers. If you’re short, then boosting your income tax withholding from your paycheck can be the best way to remedy the situation. 

The takeaway

As the new law generally will take effect almost immediately (January 1, 2018),taxpayers should not delay in determining how the new tax provisions will affect them and what planning should be done to take advantage of the favorable provisions and to minimize the negative effect of the unfavorable ones.

 Let’s talk

For a deeper discussion on how tax reform may affect you, please contact our office at 646.477.9369.