The holidays are quickly approaching – which for the tax industry means year-end tax planning should be on your radar. Have you reached out to clients yet? It’s important that both individual and business clients consult with you to make tax moves that could positively affect their tax bill come tax season.
Here are some important year-end reminders and strategies.
New Tax Laws in 2017
For higher income taxpayers ($418,400 taxable income for singles, $470,700 for married filing joint, $444,550 for heads of households and $235,351 for married filing separate), the 2017 tax year brought increased income thresholds.
Starting January 1st, The Protecting Americans from Tax Hikes (PATH) Act kicked in. This law requires the IRS to wait until February 15th to send out credits and refunds when the Earned Income Tax Credit (EITC) or the Additional Child Tax Credit (ACTC) is claimed on a return. This could affect your cash flow.
On the healthcare front, limits for Medical Savings Accounts increased by $50 this year. The maximum deductibles for out-of-pocket expenses are $4,500 for self-only coverage and $6,750 for family coverage. The minimum deductible amount for annual family coverage is $4,500. The limit on out-of-pocket medical expenses under family coverage ($8,250) increases by $100.
For those who waited to get healthcare coverage hoping that Obamacare would be overturned, they will have to pay a penalty. One of the aspects of the ACA that IRS was tasked with enforcing is the individual mandate. The fee is calculated 2 different ways – as a percentage of your household income, and per person. You’ll pay whichever is higher.
- Percentage of income
- 2.5% of household income
- Maximum: Total yearly premium for the national average price of a Bronze plan sold through the Marketplace
- Per person
- $695 per adult
- $347.50 per child under 18
- Maximum: $2,085
For Seniors looking to claim a deduction on their medical expenses when itemizing, this year is a bit different. Qualified medical expenses must be greater than 10% of your adjusted gross income (AGI). This is up from 7.5% in 2016.
Year-End Tax Strategies
Here are some traditional, end of year tax strategies to remind your clients about.
Income deferral strategies shift income to the following tax year. If you expect to be in the same or a lower tax bracket in 2018, it may be advantageous to defer some of your income or accelerate deductions into the current year.
- Self-employed, cash basis taxpayers can delay billing clients until late in the year so that they will not receive the payments until 2018.
- Try to convince your employer to consider paying bonuses in January rather than December.
- Delay selling stocks with capital gains (unless they can be offset with losses)
- Sell stocks that are in a losing position to reduce income this year.
- Delay IRA or retirement account distributions. If you are 70 ½ don’t delay the required minimum distribution.
- Convert taxable compensation into tax free fringe benefits such as negotiating to receive an incentive stock option in place of some salary. Exercising the ISO does not produce taxable income for regular tax or the surtax, but is taxable for alternative minimum tax purposes.
- Pay tax deductible expenses before the end of the year. Consider using a credit card which will conserve your cash but allow the deduction in this year.
- Maximize 401(k) and IRA contributions. Don’t forget catch-up contributions.
- If you are self-employed set up a self-employed retirement plan.
- Make qualified charitable donations (QCDs) from your IRA. If you are at least 70 ½ contributions to IRS approved charities made directly from your IRA to the charity can be used to satisfy the minimum required distribution rules but are tax free to you.
- Consider asking your employer to increase your state tax withholding now if you expect to owe state taxes when you file your return to accelerate the deduction into 2017.
- If you elect to deduct the sales taxes rather than state income taxes on your Schedule A, accelerate large purchases such as automobiles or boats into the current year in order to take advantage of the sales tax deduction
- State and local sales and use tax deduction: Taxpayers were allowed to deduct the larger of sales and use taxes or state or local income taxes paid. This provision has been particularly beneficial to retired individuals who did not have state tax withholdings during the tax year.
- Qualified Charitable Distributions: IRA owners or beneficiaries who are 70 ½ or older were permitted to make cash contributions from their IRA accounts of $100,000 or less to IRS recognized charities.
- Charitable Contributions: Now is a good time to clean out closets, attics, basements, and storage containers to donate unused items to qualified charitable organizations. Be sure to make a list of the items you donated with brief descriptions and the the fair market value of each item. Taking pictures of your donations is also helpful in substantiating your donations. Donated items must be in good or better condition to be deductible. Remember to get a receipt or written acknowledgment of all donations.
- Mortgage Insurance Premiums (PMI) deductions as qualified residence interest will expire.
- Standard Deduction vs. Itemized Deductions: Before itemizing deductions, taxpayers should calculate the federal and state tax returns using both the itemized and standard deduction to determine which is more beneficial overall. Itemizing deductions can have a negative impact on the state return, depending on the allowed state standard deduction. For instance, if a large portion of the taxpayer’s itemized deductions are state incomes tax withheld, the state return would be greatly impacted since most states don’t allow the state income tax withheld as an itemized deduction.
- Check Withholdings: Taxpayers should take time to check their withholdings to determine if they’ve withheld enough federal and state taxes during the year. If the taxpayer is at risk for having a balance due, he can increase the amount withheld from his wages. He can also make an estimated payment to decrease or completely offset the expected balance due.
- Business taxpayers will continue to be allowed to claim the 50% bonus first-year depreciation deductions (for tax years 2015-2017). The maximum deduction limit for Section 179 property purchased and placed in service in is $510,000. The limit is reduced by the amount of the cost of Section 179 property placed in service during 2017 that exceeds $2,030,000.
- If you own an S corporation or a partnership consider increasing your basis in order to deduct a loss this year or suspended losses from prior years.
- The business standard mileage rate for 2017 is 53.5 cents per business mile. Keep accurate business mileage logs to ensure you are receiving the largest legitimate mileage deduction allowable.
- Keeping accurate and up-to-date business records ensures the business will benefit by deducting the maximum legitimate expenses allowed for businesses. Sloppy recordkeeping is very costly to businesses at tax time.
Please Note: If tax reform is enacted by Congress, the changes could be made retroactive to January 1, 2017, which could eliminate a number of deductions and make itemizing unnecessary for many taxpayers. This would require changes in year-end tax planning strategies, your cash flow, and that of your EITC clients.