Posted by In the Tax Cuts and Jobs Act of 2017, Congress made significant changes to the federal income tax laws. You can take steps before the end of 2017 to benefit from the new law or to preserve tax benefits that may not be available in 2018. If you have questions about how the new law might affect you, just give us a call or send a message for a free consultation!
Defer Income. One strategy is to defer income until 2018. Tax rates generally will be lower in 2018 than they are in 2017. Accordingly, having the income in 2018 will result in a smaller tax bill. Most individuals use the cash method of accounting, which means that income is included in the year it is received. Thus, if you are in a service business and you provide services between now and the end of 2017, you might time your invoice for those services so that you receive payment in 2018. If you plan to sell corporate stock or other investments that have gone up in value, you could wait until 2018 to make the sale.
- Note, you cannot avoid having income that you “constructively” receive. For example, if your employer tells you that your paycheck is ready to pick up on December 28, you cannot defer the income by waiting until January to pick it up.
Accelerate Deductions. Another strategy is to accelerate deductions. Beginning in 2018, many more taxpayers will take the standard deduction instead of itemizing their deductions. (Itemizing deductions simply means to list specific deductions separately on the return.) Taxpayers take the greater of the standard deduction or their itemized deductions. Many more taxpayers will take the standard deduction because, for tax year 2018 and later years, the new legislation significantly increases the standard deduction and limits or eliminates some of the most common itemized deductions.
Increased Standard Deduction for 2018. In 2017, the standard deduction is $6,350 for a single person and $13,700 for a married couple filing a joint return. In 2018, these figures will increase to $12,000 and $24,000, respectively. This means that a married couple filing a joint return will itemize their deductions in 2018 only if, in total, their itemized deductions exceed $24,000. Because Congress has limited or eliminated common itemized deductions, many people will find that their itemized deductions in 2018 do not exceed the standard deduction. People in this position will take the standard deduction in 2018, which means that items such as home mortgage interest, state taxes, and charitable contributions will not provide any tax benefit.
New Limits on Itemized Deductions. Among the limitations that Congress has placed on itemized deductions beginning in 2018 are the following: (1) interest on home equity loans will no longer be deductible, (2) the total deduction for state taxes (income, sales, and property taxes) cannot exceed $10,000, (3) investment-related expenses such as fees paid for investment services will no longer be deductible, and (4) business expenses paid by an employee that are not reimbursed by the employer will no longer be deductible.
Strategy-Pay Deductible Items in 2017. To take advantage of deductions that may not be available in 2018, consider paying certain deductible items by December 31, 2017. In order to count as a deduction for 2017, these items would have to be paid in 2017, which means either making actual payment in cash, through a credit or debit card, or mailing a check that is postmarked no later than December 31, 2017.
Among the items to consider paying now are the following:
- State property taxes. If you have the option of paying property taxes now or in 2018, paying them in 2017 would permit taking them as a deduction in 2017. (The same treatment is not available for state income taxes. You can pay 2017 state income taxes now and take a deduction, but the legislation specifically provides that a person cannot make a deductible prepayment in 2017 of 2018 state income taxes.)
- Cost of large purchases, such as cars or boats. Considering purchasing a new car, boat, RV, motorcycle, or similar item? You might consider making the purchase in December rather than next year. The state sales tax you pay on these large purchases is deductible in addition to the standard state sales tax deduction. (This is most beneficial in states such as Texas that do not have a state income tax. For federal tax purposes in 2017, you can deduct the larger of state sales tax that you pay or state income tax. Because Texas does not have an income tax, those residing in Texas deduct state sales tax.)
- Charitable contributions. If you normally donate to a school, your church, or another charitable organization during the year, you might consider paying in 2017 some of the amounts you had planned to contribute in 2018.
- Home mortgage interest. If your first 2018 mortgage payment is due in early January, consider paying it in 2017 to maximize the amount of deductible mortgage interest you pay in 2017.
- Investment expenses. Investment-related costs such as fees paid for investment advice or the cost of a safe deposit box for investment property will not be deductible in 2018. Consider paying these in 2017. (Note: these costs are deductible only to the extent that, when combined with certain other deductions, they exceed 2% of your adjusted gross income.)
- Expenses you pay as an employee. If you are an employee (as opposed to a business owner) and you pay expenses in your job that your employer does not reimburse, consider paying now expenses that you normally would pay in January. (Note: these costs are deductible only to the extent that, when combined with certain other deductions, they exceed 2% of your adjusted gross income.)
- Tax preparation fees. Congress eliminated the deduction for tax preparation fees beginning in 2018. Consider paying the cost of having your 2017 return prepared in 2017 rather than 2018. (Note: these costs are deductible only to the extent that, when combined with certain other deductions, they exceed 2% of your adjusted gross income.)