A sweeping new tax law has just passed in the final days of 2017. Given the swift passage of this legislation so close to year-end, taxpayers have been left with limited time to respond proactively. Nonetheless, below are some last-minute options you may have for reducing your taxes due for 2017 (for tax returns prepared in 2018 for tax year 2017). Learn more about this new, December 2017 U.S. tax law that takes effect January 1, 2018 here.
Taking action in this final week of December, 2017 may be helpful for three reasons: 1) itemized deductions will be limited beginning in 2018, 2) tax rates are generally higher in 2017, rendering deductions more valuable in tax year 2017, and 3) ‘lumping’ itemized deductions, such as charitable contributions, together every few years may become more common under the new tax rules given the higher standard deduction and limitations to itemized deductions.
Most importantly for our clients: we will be discussing tax planning further with you throughout 2018 to identify your personal impact under the new law, and the best way to continue minimizing your income taxes.
Options Remaining in the Final Days of 2017
The law has intentionally limited your ability to pull forward certain expenses for 2018 and receive a tax deduction in 2017, however there are a limited number of things you can do at this time that may provide additional tax savings over the next year.
Prepay Certain Local Taxes
If you make quarterly estimated state income tax payments already, or otherwise expect to owe a remaining income tax balance to the state for 2017, you can prepay that amount in advance before year-end. You cannot, however, prepay any 2018 income taxes and receive a tax deduction.
Also, a limited number of municipalities may accept pre-payment of your 2017 county real estate taxes that would otherwise be due in 2018. For example, Douglas County in Nebraska and neighboring Pottawattamie County in Iowa have now stated they will accept prepayment of 12/31/2017 dated taxes in 2017, for which statements have recently been sent to taxpayers. Other notable municipalities across the United States have stated they will not accept such prepayments this year, so you should check your municipality’s policy on this before submitting a payment this year.
These steps can both be very helpful if you itemize deductions in 2017, as state individual income, sales and property taxes will be limited to a maximum of $10,000 a year starting in tax year 2018.
Please note:
- Those impacted by the Alternative Minimum Tax (AMT) may not receive any additional benefit from prepaying local taxes
- Those with outstanding mortgages (with escrow accounts) may have difficulty prepaying their real estate taxes when also utilizing an escrow account. Your options include contacting your mortgage lender for guidance on their handling of this, or simply making the overpayment, and possibly allowing for a year or so for the monthly escrow payment to reflect the overpayment during the lender’s normal recalculation schedule.
- IRS guidance in the coming months may later disallow a deduction in 2017 of prepaid property taxes. This isn’t necessarily the most likely scenario based on the drafting of the tax law, but some have interpreted there to be enough flexibility in the law for the IRS to issue guidance disallowing taking such a deduction in 2017. However, if this were to happen, you will have to pay only a few months later anyway, so the risk is negligible given the potential reward here.
Make a Charitable Contribution
If you give to a charity or church already, or plan to do so in the coming years, making a gift before the end of this year could help if you itemize deductions.
You may also consider using a community foundation account, such as the Omaha Community Foundation’s charitable checkbook account. These accounts often have little-to-no fees, and can allow you to receive a charitable deduction now, but disburse contributions to different charities later by writing them checks directly from the account.
Generally, these accounts also allow for online contributions right from the charitable foundation’s website, and while it would not be possible still in 2017, in future years you could use accounts like this to gift a stock directly, and write a check to the charity for the proceeds.
Other Options
This list is not exhaustive. Some may receive a small benefit from making contributions to a 529 now for a new purpose. For example, such accounts can now also be used to pay for private K-12 tuition as well. The contribution limits have not changed, nor has the state income tax deductibility (there is no federal tax deduction for 529 contributions). If you choose to use a 529 for this new purpose, it is beneficial to use a separate account, as the investment timeline can be much different for K-12 and college use.
Author: William A. Callahan, RLP, CFA, CFP®
William founded Callahan Financial Planning and previously served as President of the firm.