Year-End Tax Planning Can Yield Significant Savings for Individuals and Businesses by Jeffrey M. Mutnik, CPA/PFS
Posted on November 12, 2017
As 2017 draws to a close, the future of tax and regulatory reform hangs in the balance. The House of Representatives just passed a budget resolution that includes allusions to major modifications to the tax rules, but details are scant. Despite this current environment of uncertainty, the end of the year remains a critical time for individuals to meet with tax advisors, review their finances, and take steps to minimize their tax liabilities and improve savings opportunities in the current year and into the future. Following are just some strategies that individuals and business owners should consider taking before the new year.
Defer Income to 2018, Accelerate Deductions and Expenses in 2017
There are a variety of ways you can reduce your tax liabilities in the current year, including delaying the recognition of income until next year. For example, you may choose to defer a year-end bonus, delay until next year the sale of capital gain property or collection of debts, or you may postpone the sale of employee stock options or withdrawals from retirement accounts above the amount of a required minimum distribution (RMD) if you are older than 70 ½.
Likewise, you may look for opportunities before the end of the year to claim tax deductions, which can reduce the amount of income that is subject to tax. Examples include contributing to retirement plans (401(k)s, SEPs, etc.), donating to charity, or paying alimony, real estate taxes or medical expenses in the current year.
For business owners, you may have an opportunity to claim deductions when you pre-pay business expenses before the end of the year. If you are self-employed, you may also deduct up to 100 percent of the costs you incur to provide health insurance to you, your spouse and your dependent children who are younger than 27.
Harvest Capital Losses
While the market has soared to new highs in 2017, investments that you sold for a profit will be subject to capital gains tax. Depending on how long you held the asset before a sale, the capital gain rate can be as high as 39.6 percent plus an additional 3.8 percent Net Investment Income Tax (NIIT). To counter this, you may sell underperforming investments before the end of the year to generate a tax loss that can reduce your taxable income in 2017 or be carried forward to potentially offset gains in 2018. Furthermore, matching the holding periods (short-term losses to offset short-term gains and long-term losses to offset long-term gains) will maximize the use of your personal tax attributes.
When harvesting capital losses, it is critical that investors first consider whether or not asset sales make sense in relation to their existing investment strategy. Disposing of an asset solely for a tax benefit may disrupt and derail your long-term financial goals.
Assess Accuracy of Tax Liabilities
To reduce the risk of an unexpected tax bill come April 15, 2018, take the last few weeks of 2017 to ensure that the appropriate amount of taxes were withheld from your paycheck and you paid your appropriate estimated taxes. You have until Dec. 31, 2017, to increase the amount your employer withholds from your paycheck and update your IRS Form W-4 to reflect life events, such as a marriage, divorce or birth of child, all of which will affect your ultimate tax liabilities.
For Florida residents affected by Hurricane Irma, the deadline for the 2017 third and fourth quarter estimated tax installments is Jan. 31, 2018. Therefore, there is still time for you to limit or eliminate a potential penalty. However, to do so, planning will be crucial.
If you work for an employer that offers a 401(k) retirement plan, you have until Dec. 31, 2017, to max out salary deferral contributions to these accounts. Your contributions, which can be as high as $18,000 in 2017 (or $24,000, if you are 50 or older), will reduce your taxable income in the current year and grow tax-deferred until you take withdrawals after the age of 59 ½. If you are a business owner, you have until April 15, 2018, to make a pre-tax contribution to your 401(k) and apply it to your 2017 tax returns, depending on the exact specifications of the plan.
If you do not have an employer-sponsored retirement savings plan, there is still time to set up an individual retirement account (IRA). The maximum amount you may contribute in 2017 to a traditional IRA or Roth IRA before April 15, 2018, is $5,500, or $6,500 if you are age 50 or older. The type of IRA you are eligible to set up will depend on your filing status and annual income.
If you are 70 ½ years of age or older and you did not work in 2017, you must take a required minimum distribution (RMD) by Dec. 31, 2017, or risk a penalty of 50 percent of the undistributed amount. If you are still working, you may postpone the RMD until the year in which you actually retire. Furthermore, if you turned 70 ½ years old in 2017, you have a one-time option to defer taking your initial RMD until April 1, 2018, which will allow you to effectively defer income from 2017 to 2018. However, you will also need to take another required distribution in 2018, which will cause a double up income in that tax year. This may be worth reviewing with your tax advisors if you expect a lower tax rate or lower levels of other income in 2018.
If you are older than 59 ½ and you need access to cash, you may be able to make a 2017 contribution to a tax-deductible retirement plan before the Dec. 31, 2017, or April 15, 2018, deadlines and subsequently withdraw the needed funds the following week. This will allow you to defer income from 2017 to 2018 when it is expected that tax rates will be lower.
Give Gifts to Charity and Family
By making gifts of money or property, either to charities, family members or friends, you will potentially reduce the amount of your income that will be subject to tax. For example, donations to qualified charitable organizations are fully deductible (up to certain income thresholds) against both income taxes and the alternative minimum tax (AMT) as long as you mail or charge the donations to your credit card before Dec. 31, 2017. If you donate appreciated property that you owned for more than a year, you may receive a deduction equal to the property’s current fair market value rather than your original basis, or amount you paid, when you acquired the property. Moreover, you will not have to report the appreciation as income. Similarly, you may donate up to $100,000 of your 2017 RMD directly to a charity by December 31 to avoid the income inclusion and plethora of potential charitable deduction limitations.
In addition, you may have an opportunity to reduce your taxable income and protect your assets from exposure to estate and gift taxes if you give gifts of less than $14,000 to as many people as you wish before Dec. 31, 2017. For married couples, the maximum amount that may be excluded from taxes is $28,000 in 2017. In 2018, these gift tax exclusion limits will rise to $15,000 for single filers and $30,000 for married taxpayers filing joint tax returns. It is important to remember that there is no annual limit on the amount you may gift tax-free to your spouse unless he or she is not a U.S. citizen. Similarly, you may pay as much as you like directly to an educational or medical institution to cover the costs of tuition or medical expenses for another person without gift tax implications.
The entity you select to hold your personal and business assets will have far-reaching effects on your exposure to income, estate and gift taxes; privacy; protection from creditors; and control over distributions of assets. The end of the year is a good time to meet with professional advisors to review the assets holding structures you currently have in place and make adjustments, as needed, to align with changing life circumstances.
Minimize Business Tax Liabilities
In addition to the above strategies that apply to individual taxpayers and business owners, there is still an opportunity for business entities to minimize their 2017 tax liabilities when they take the following steps before December 31.
If you established a new business in 2017, you may be able to deduct up to $5,000 in qualifying startup expenses, including the costs for advertising, travel, training, and legal and accounting fees. Additionally, if your business is a qualifying startup, it may be able to apply up to $250,000 of research and development expenses against its payroll tax liabilities.
Under Section 179 of the Internal Revenue Code, businesses that purchase new equipment may deduct from their 2017 income up to $510,000 of their acquisition costs in the current year rather than depreciating those assets over a period of time. The deductible amount will be reduced, dollar-for-dollar, by each qualifying Section 179 property exceeding $2.030 million that the business puts into place in 2017. As an added advantage, when a business purchases and puts into place in 2017 qualifying property, including improvements to interior portions of nonresidential buildings after the building is first placed in service, it may take a significant 50 percent first-year bonus depreciation deduction. If the business waits until 2018, the first-year bonus depreciation benefit will be reduced to 40 percent. In 2019, it will decrease to 30 percent.
Finally, businesses must be prepared to comply with a slew of new accounting standards that take effect in the coming years, including, but not limited to, new methods for recognizing revenue from contracts with customers, accounting for operating leases on balance sheets and disclosing more details about expected credit losses.
Meet with your Accountant
With the tax laws in a constant state of flux and the uncertainty of a complete overhaul of the tax code, individuals and business owners should take the time now to meet with their accountants and financial advisors. There is still time left in the year to take action and implement strategies that can improve your tax-efficiency and help you achieve your personal and business goals in 2017 and beyond.
The advisors and accountants with Berkowitz Pollack Brant and its affiliate Provenance Wealth Advisors work with U.S. and foreign citizens and businesses to develop tax-efficient solutions that meet regulatory compliance and evolving financial needs.
About the Author: Jeffrey M. Mutnik, CPA/PFS, is a director with the Taxation and Financial Services practice of Berkowitz Pollack Brant Advisors and Accountants, where he provides tax and estate-planning counsel to high-net-worth families, closely held businesses and professional services firms. He can be reached in the CPA firm’s Ft. Lauderdale office at (954) 712-7000 or via email at firstname.lastname@example.org.