December isn’t traditionally seen as tax time, but given that Congress passed an overhaul of the tax code this week, it makes sense to consider taking steps now to lower your tax bill for 2017 — before you lose your chance.
For example, people who have some control over the timing of their income might want to consider delaying incoming money until 2018. The tax bill reduces income tax rates, plus it offers a new 20% deduction for certain qualified business income. If you think your own tax rates might be lower next year, then delaying income could make sense.
Read on for five more ways to reduce your tax bill in the last few days of 2017.
1. Be generous
One major change under the new rules is a near-doubling of the standard deduction, a move which likely means more people will forgo itemizing. If you tend to be an itemizer, consider bunching your deductions into this year to make the most of their value.
One popular deduction is for charitable contributions. You don’t want to stop giving to worthwhile causes just because of a change in the tax rules, but given the change, you might consider grouping your donations into 2017. (This assumes you stop itemizing next year, and that will depend on your own personal financial situation.)
You can claim charitable donations as tax deductions for 2017 as long as you make them by Dec. 31, and itemize your deductions on your tax return. Donations of money, clothing or household items all qualify. Many nonprofits also accept cars or other vehicles, and some accept stock that has appreciated in value but may no longer fit your portfolio strategy. Whatever you give, get a receipt. Without one, the IRS can nix your donation deduction.
Another method for giving is a donor-advised fund, says Tim Steffen, director of advanced planning at financial-services firm Baird, in Milwaukee. “Think of a donor-advised fund as a miniature private foundation,” he says. “You can put whatever money you want into it today, you get a tax deduction today, but you can make gifts to charities over time, over multiple years, as you see fit. It doesn’t have to happen all at once.”
Older taxpayers have an additional option. If you’re 70½ or older, you must take a specified amount each year, known as a required minimum distribution, from your traditional IRA, 401(k) or other tax-deferred retirement accounts. Fail to do so by Dec. 31 and you’ll face a stiff tax penalty. But if you directly transfer your distribution amount to an IRS-qualified charity, you’ll meet your withdrawal requirement and won’t owe tax on the money.
2. Consider harvesting capital gains and losses
Reviewing and rebalancing your investment portfolio is a good annual exercise. Despite the new tax rules, investors’ decisions in this area aren’t too taxing, so to speak, given that rates on long-term capital gains remain the same.
Still, investors who live in high-tax states may face a conundrum. One new rule to consider for 2018 is the $10,000 cap on deducting state and local income taxes, as well as property taxes. Should an investor with unrealized gains sell securities now, so as to enjoy the unlimited state income tax deduction available in 2017? That’ll depend on each investor’s situation, but taxpayers living in high-tax states should consider their options.
Don’t let tax rules dictate investment decisions.
When considering federal taxes only, there’s no real incentive “to take unrealized gains this year, unless it otherwise made sense from an investment point of view or if you wanted to offset realized capital losses,” says Mark Luscombe, principal analyst with Wolters Kluwer Tax and Accounting in Riverwoods, Illinois.
For a taxpayer in a high-tax state like California, he says, “If you take the gains this year and get the income for state tax purposes this year, you might have less problem deducting the state taxes from your federal return this year than next year.”
But you don’t want tax bills to dictate investment decisions, Luscombe says. “Normal time value of money considerations would say to wait until you want to sell for investment reasons,” he says.
With taxes, of course, there are rarely simple answers, so assess your own situation carefully. For example, taking a large gain this year could push you up against the income amount at which point the value of itemized deductions is reduced, Steffen says, so proceed with caution.
Don’t forget investment losses, too. Folks in higher tax brackets face capital gains taxes of 15% or 20% on the sale profit of long-term assets. You can offset that tax by selling other holdings that have lost value. If it was a bad investment year and you have more capital losses than gains, use up to $3,000 of your excess capital losses to reduce your ordinary income.
Meanwhile, if your income is low in 2017, one year-end tactic is to consider selling some stock you’ve held for more than a year that has increased in value. Investors in the 10% or 15% tax brackets don’t have to pay capital gains tax on these long-term capital gains.
3. Take advantage of your home
Homeowners should take note of the new tax rules for deducting property taxes. Currently, homeowners can deduct the full amount of their property taxes. Starting in 2018, that benefit is capped at $10,000, and state and local income taxes are included in that cap. One year-end strategy is to prepay taxes now, so you can enjoy the unlimited deduction. While the new rules specifically prohibit taxpayers from prepaying their 2018 state income tax in 2017, there’s no rule against prepaying property taxes. (Of course, you’ll need to determine whether that move makes sense for your own personal situation.)
» Check out: How tax reform would change homeownership
Another way to boost homeownership tax breaks is by making your January mortgage payment by Dec. 31, moving its tax-deductible loan interest into this tax year. Keep in mind that this will give you one less payment to deduct next year, so make sure you need the break in 2017.
During the last days of the year, you can take steps to lower your bill when you file your tax return.
4. Make medical moves
The new tax rules offer a benefit for those who claim a deduction for medical expenses: Your expenses will have to exceed only 7.5% of your adjusted gross income to claim that deduction, down from 10% before.
And the 7.5% threshold is in effect for 2017 and 2018, after which it’s slated to rise back to 10%. To clear that threshold, consider scheduling medical treatments before Dec. 31, or bunching your medical expenses into 2018, if possible.
If you have a medical flexible spending account at work, don’t waste that money. Some companies let employees use funds through the following March or carry up to $500 into the next year, but others require FSA owners to use or lose the funds by the end of the year.
5. Pay for college
Students and their parents may be relieved that tax reform left most of the major education tax breaks alone. But there are still tax strategies to consider.
For example, you can pay next semester’s college tuition now and claim the American Opportunity Tax Credit on this year’s tax return. The credit, a dollar-for-dollar reduction in any tax you owe, could be as much as $2,500 and can even refund you up to $1,000 if you don’t owe any tax. (Note that there are income limits to be eligible for this credit.)
The early payment option also applies to school costs that can be used to claim the Lifetime Learning Credit, which is worth up to $2,000 and available for students beyond the standard four years of undergraduate study.
Kay Bell contributed to this report.