6 Last-Minute Tax Tips That Could Save You Money in 2017
By John Foley, CFP®
As you’ve no doubt read in the news, the Tax Cuts and Jobs Act of 2017 is about to become law. And while the bill contains over 500 pages of changes to the tax rules for corporations, privately held businesses, and individuals, what you’re probably wondering most is: How will the tax plan affect me?
There are three big changes in the Tax Cuts and Jobs Act that will impact most individual taxpayers:
1) New income tax brackets with lower rates for most taxpayers
2) A higher standard deduction—$12,000 for single filers, $24,000 for married filing joint
3) A $10,000 limit on the combined deduction for state and local income and property tax (and that’s the same whether you’re single or married)
While you can’t change the rules, there are things you might be able to do to potentially lower your overall tax burden this year and next, namely, shifting certain deductions into 2017 and certain income into 2018. But the clock is ticking: These provisions are expected to go into effect on January 1, 2018, so December 31 is the last day you can do anything that impacts your 2017 taxes.
Here are a few important actions you could take before the new tax bill kicks in. Ask your tax preparer if they are right for you.
Accelerate itemized deductions
Deductions are subtracted from your income before any tax is applied. People can take either the standard deduction or itemize their deductions, whichever results in paying less.
The higher standard deduction means that many people who itemize now will take the standard deduction next year. If you fall into that category, a bigger itemized deduction this year will reduce your 2017 tax bill, but a smaller one next year is less likely to increase next year’s tax. Be sure to ask your tax preparer if deducting more this year might be right for you. It might not be if you are subject to the Alternative Minimum Tax (or close to it). But otherwise, you may want to consider the following:
1. Pay all your 2017 state income tax this year
Normally it’s not bad to owe a small amount of state and local income tax when you file in April. That payment is deductible against next year’s federal tax, not this year’s. Now, most people who don’t pay AMT will want to shift that into 2017. Ask your tax preparer if these will work for you:
– If you pay estimated state and local taxes, your last payment for 2017 is due in January. This payment would be a deduction in 2018—subject to the $10,000 restriction. Pay in December and you can deduct it in 2017 and not worry about the restriction.
– If your preparer thinks you might owe state tax in April, consider making an estimated payment before the year ends so you can deduct it this year. If you get a state tax refund, it will be taxed at next year’s lower federal rates.
Unfortunately, there is a provision in the law that prohibits prepaying your 2018 state income tax and deducting it this year. So you can’t do that.
2. Push forward property tax
The law does permit paying property tax that would be due in 2018 this year and deducting it for 2017. Many states split annual property tax payments into two payments—for example, California has one in December and one in April. If this is how it works in your state, and if you can afford it, consider making the 2018 payment in December. One note: The payment is due to the state by the end of 2017, so this may not work if you pay your property taxes through an escrow account or co-op.
3. Give back
Being able to deduct money you’ve given to charitable causes is not going away, but unless you donate a lot of money, it is unlikely to exceed the new standard deduction. So, if you know you’ll be making contributions next year, say to your church or alma mater, consider making them this year instead.
4. Harvest capital losses
While the new law keeps the old long-term capital gains tax rates and rate breakpoints, it is generally a good idea to look at your portfolio for investments that have not worked out and sell them to take your losses. These losses can offset capital gains from other investments and up to $3,000 can still be deducted against ordinary income if your losses exceed your gains. You can also carryover excess loss claimed in 2017 into future years.
For most people, shifting income from this year to next is harder than shifting deductions, but it’s worth checking with your tax advisor if this might apply to you. If you can do it, it may pay off.
5. Bill in January
If you are an independent contractor who has some control over when you bill clients, consider waiting until 2018 to send your invoice. Rates are lower next year, and especially if you’re in a higher bracket, this could make a difference.
6. Wait to exercise employee options
If you have stock options from your employer, ask your tax advisor if you should wait until next year to exercise them (unless they are about to expire). If you exercise Incentive Stock Options (ISOs) this year, you might have to pay Alternative Minimum Tax (AMT) on the difference between the strike price (what you pay for the stock) and the fair market value of the stock. In 2018, the AMT will not go away entirely, but will apply to fewer people, so it might be a good idea to wait. Even if your options are not ISOs, rates will be lower for most people next year, so it will probably pay to wait.
One thing that isn’t changing in the new tax bill? The fact that taxes aren’t a simple matter. SoFi is committed to helping our members make good financial decisions, but we can’t answer questions about your tax situation. If you need some help sorting through the moves you should make, we recommend hiring a tax pro. Just do it before the year ends and it’s too late to impact this year’s tax bill.
SoFi does not render tax or legal advice. Individual circumstances are unique and we recommend that you consult with a qualified tax advisor for your specific needs.