Last minute tax planning Ideas
October 29, 2017
Tax planning 101: If your tax bracket is expected to be lower in 2018, defer income and accelerate deductions in 2017. If you expect to be in a higher bracket next year, do the opposite. If your income level will stay the same, paying taxes later is always better. Of course, this is an OVERLY SIMPLIFIED rule. With the uncertainty of a Trump tax policy, AMT tax traps, benefit phase-outs, etc., there is much to be considered. (Read my article on tax impact with Trump's victory.)
The following are some simple ideas from Virtual CPA for You, your trusted online accounting and tax CPA. It’s worth going through them. Sometimes by just considering using one or two of these ideas, you can cut a big chunk from your tax bill.
IDEAS to defer income and accelerate deductions
•If you have capital gains, sell loser stocks (mutual funds, etc.) to harvest the loss. Repurchase them 31 days later or swap with other securities right away (be aware of wash sale rule).
•Use your credit card to pay tax-deductible expenses before year-end if you don’t have cash on hand.
•Packaged payment: Pay up front to get the deduction. For example, pay dental braces upfront. (especially to bundle expenses to reach the threshold of deduction, see below)
•Pay 4th quarter estimated state taxes in December.
•Pay property taxes early.
•If you are eligible for HSA, make a fully deductible contribution. Establish an HSA account that offers investment features. HSA is like a deductible ROTH account. Contributions are deductible. You can withdraw right away for eligible expenses or grow it tax-free.
•Donate appreciated stock instead of donating cash. For example, $500 worth of stock with a $100 cost. When you donate, you get deductions of $500 and also avoid paying tax on the stock appreciation of $400.
•Increase your retirement account contributions.
•Bunch your expensive medical procedures into one year, pay upfront if it helps you exceed the 10% AGI floors.
•Bunch miscellaneous expenses into one year to exceed the 2% AGI floor: Examples are professional fees, tax fees, investment expenses, legal fees, etc.
•Salaried employees: Don’t underestimate non-reimbursed work-related expenses (especially when bundled with other misc. itemized deductions)
•Dispose a passive activity to deduct suspended passive activity losses.
•Certain business assets purchased can use in Section 179 to write off the purchase of up to $500,000.
•When considering buying a business car, SUVs and pickup trucks weighing 6,000 pounds continue to be exempt from the luxury auto limitation and offer the best tax savings.
IDEAS TO accelerate income and defer deduction
•If you receive restricted stock, elect to be taxed right away.
•If you receive ISO, exercise options and sell the stock.
•Sell appreciated assets.
•If you have installment contracts, sell to a third party for a sum.
•Convert IRA to Roth.
IDEAS to avoid underpayment penalties on estimated taxes
•Withholding is considered to have been paid through the year. If you are a salaried employee, have an extra amount withheld from your last couple of payroll checks.
•Take a rollover distribution from a qualified retirement plan before year-end. Income tax will be withheld from the distribution. You can then timely roll-over the gross amount of the distribution right after the new year.
IDEAS for tax credits
• American Opportunity Tax Credit: Pay 2018 tuition (academic period needs to begin within 3 months of 2017) in 2016. You can get a maximum annual credit of $2,500 per eligible student.
•There are many tax credits for energy efficiency that will expire at the end of this year. If you are thinking of home improvement, check out the Energy Star Website for details.
•Retirement Savings Contribution Credit. Especially when you have a low income year, this credit can be as much as 50% of your contribution up to $2000.
IDEAS NOT TO FORGET
•Consider your tax bracket when you have capital gains. The long-term capital gains rate is 0% for the 15% tax bracket and 15% for most of people but 20% if your tax rate is 39.5%. Keep your income below the threshold.
•Exclusion for Mortgage Debt Forgiveness for your home sale expires at year end. However, if discharge is made under a binding written agreement entered into in 2016 , exclusion still applies to qualified principal residence indebtedness discharged in 2018.
•Marital status is decided based on a person's marital status on December 31. A divorce or marriage before (or after) December 31 can change your tax bill. Run the numbers to see which way is better.
•Retirement saving account: Withdraw excess contributions before year end to minimize the excise tax of 6-10%. Read more: IRS 2016 contribution limit.
•Contribute to a non deductible IRA that can be converted to Roth IRA later.
•If your business qualifies for the domestic production activities deduction (DPAD), consider whether the 50%-of-W-2 wages limitation applies. Consider ways to increase your 2017 W-2 income. Read more see if your business activities qualify: IRS DPAD Definition.
•If you own an interest in a partnership or S corporation, consider whether you need to increase your basis in the entity so you can deduct a loss from it for this year.
•AMT consideration: The taxpayers(MFJ) with ordinary income between $200,000 and $500,000 or large capital gains might be in the AMT trap. Accelerating certain deductions has no tax benefit. Sometimes, accelerating income is a better tax strategy, especially if your income fluctuates greatly from year to year.
•Set up a retirement plan before the deadline. i.e.: Solo 401K plan needs to be set up before year end. (Solo 401K plan offers a greater deduction than SEP IRA in many cases)
•Read some common errors in 1040 filing and try not to make those mistake this tax season.
If you have any questions, please do not hesitate to contact us. Virtual CPA for You is a 100% paperless on line accounting and tax service based in California. With technology, communicating can be faster and more secure than face-to-face meetings.
Circular 230:The articles are for general information only. In accordance with IRS Circular 230 they are not considered tax opinions for purposes of relying on such statements in any challenge of the reporting of the above transaction by the IRS. If a full tax opinion is required certain procedures must be met . Also there is a significant cost for a full tax opinion to meet the requirements of Circular 230.
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