At year-end, there’s generally a flurry of last-minute efforts to reduce tax bills. However, with tax reform now law (you can read about some of the provisions now), taxpayers are stressing more than usual this year over what to do to avoid writing a big check for the 2017 tax year – and not be caught off-guard in 2018. Many questions involve some pretty serious changes like, “Should I incorporate?” or “Should I capitalize my business?” But you don’t have to make monumental changes in your lifestyle to see a little extra change in your pocket come tax time. Here are ten relatively stress-free year-end moves to make to save on taxes after tax reform:
1. Give To Charity. Charitable donations are an easy way to reduce your taxable income if you itemize. In order to claim a charitable deduction on your tax return, you must itemize your deductions on a Schedule A. With some itemized deductions on the way out in 2018 – and the standard deduction on the way up – there may be less of a tax incentive for charitable donations in the new year (there are still non-tax reasons to give). If you anticipate itemizing your deductions for the 2017 tax year but not doing so in 2018, consider giving to charity by year-end to maximize your deductions. For more on charitable giving, check out this prior post.
2. Pre-pay Property Taxes. Under the new law, deductions for state and local sales, income, and property taxes normally deducted on a Schedule A remain in place. There is a catch: Beginning in 2018, there is a $10,000 cap ($5,000 for married taxpayers filing separately) on the total of state and local sales, income, and property taxes. If you live in a state with high income or property tax rates, the cap may limit your ability to deduct both in 2018. However, there is no such limit in 2017 (other than the overall limit on itemized deductions). That means that taxes paid in 2017 should be deductible for the 2017 tax year. Congress anticipated that taxpayers would want to pre-pay taxes to get a jump on the new law so they specifically noted that amounts paid in one year for state or local income taxes which are properly attributable to another year will be treated as paid in the later year. In other words, state and local income taxes paid in 2017 for taxes imposed for the 2018 tax year will be treated as paid in 2018. But while you can’t pre-pay your 2018 state and local income taxes in 2017 to avoid the cap, there is not, to date, a similar restriction on property taxes. Consider writing a check now (assuming your state or municipality will accept it) to get ahead.
3. Pay Off That Home Equity Loan. The mortgage deduction remains in place for 2018 – but there’s a change. As of December 15, 2017, there’s a limit on new acquisition indebtedness – your mortgage used to buy, build or improve your home – of $750,000 ($375,000 for married taxpayers filing separately) The limit for mortgages taken out for acquisition indebtedness before December 15, 2017, is $1,000,000 ($500,000 for married taxpayers filing separately). However, for tax years 2018 through 2025, there is no deduction available for interest on home equity indebtedness – indebtedness other than acquisition indebtedness that is secured by your home. If you have the resources available and there’s no pre-payment penalty, consider paying off the loan early so that you don’t lose the value of the deduction.
4. Spruce Up Your Home Office. If you’re an employee who works from home, there’s some bad news for you in the tax reform law: The home office deduction on Schedule A is disappearing. However, it remains in place for 2017. If you normally claim the home office deduction, now might be a good time to spruce up the joint. That paint job or electrical work that needs to happen? Reasonable and necessary expenses will still be deductible so long as you pay for them by year-end. You can find out more about the home office deduction here. And if you’re an independent contractor or a business owner, don’t panic: You can still claim your home office expenses in 2018. That doesn’t mean you shouldn’t spend a little extra in 2017 if you’re looking to boost business expenses and trim year-end income.
5. Stock Up On Office Supplies. As the home office goes, so do unreimbursed job-related expenses. If you’re an employee but provide your own supplies like copy paper, pens, and paper clips, you won’t be able to take claim those costs in 2018, but you can still take advantage of the deduction for 2017. Take inventory of what you may need this coming year and pay a trip to your local office supply store to stock up in advance on what you’ll need for the coming year. Again, if you’re an independent contractor or a business owner, don’t worry: Your deduction isn’t going anywhere. But who doesn’t love a trip to the office supply store?
6. Go On A Job Search Blitz. The new year is a great time for resolutions and that might include finding a new job. But those job search expenses that you used to be able to deduct on your Schedule A? They won’t be deductible in the new year. They remain deductible for 2017. Instead of moping about your current job situation, take charge now. While you can’t deduct the cost of looking for your first job or looking for a job in a new profession, you can deduct the costs of finding a job in your current profession. This includes items like resumes and stamps, fees paid to employment agencies, and the costs of getting a portfolio, look book or other work samples together. If you do it now, you can take advantage of the deduction – and get a jump on the competition in the new year. For more on job search expenses, check out this article.
7. Top Up Those 529 Plans. You can’t claim a federal income tax deduction for making a contribution to a 529 plan but beginning in 2018, 529 plans are expanding to allow you to use distributions from the plan to cover more expenses. You already knew that you could use funds for college, but beginning in 2018, you can use up to $10,000 of 529 savings plans per student for public, private and religious elementary and secondary schools. If the idea of paying for elementary school and college scares you more than a little, consider putting away money now to use in a few years. And if your bank balance is already on the low side from all of that holiday spending, relax. You don’t have to write a huge check today but you can schedule regular payroll or bank transfers of just a few dollars moving forward.
8. Schedule Last-Minute Medical Procedures. Medical expenses were on the chopping block as part of tax reform. Not only did they survive the cut but Congress moved the floor back to 7.5% and made it retroactive to the beginning of 2017. What that means is that if you itemize your deductions, you can deduct medical and dental expenses paid this year which exceed 7.5% of your adjusted gross income (AGI). Here’s how that works. Let’s say your AGI is $40,000 and your medical expenses are $5,000. Assuming you itemize, you can claim $2,000 as a deduction, or $5,000 in expenses less the floor (7.5% x $40,000 = $3,000).
Medical expenses include such items as prescriptions, doctor’s visits, and health insurance premiums, as well as other expenses like that dental procedure or operation you’ve been putting off. Surgeries and procedures don’t have to be for a life-threatening condition to be considered medically necessary; they might include anything from cataract removal to a root canal. Surgeries and expenses related to treatment in foreign countries may also be deductible, not that I’m necessarily recommending it. And no, it doesn’t have to be as dramatic as all that since medical expenses include the more mundane procedures, too, like year end checkups, dental or eye exams, and routine blood work. In terms of timing, the deduction is available in the tax year in which the bill was paid, not when services were rendered – so even if you can’t get in to see the doctor just yet, you might be able to pay upfront and still claim the deduction.
9. Go See Your Tax Pro (Or Your Lawyer). If you’re a regular reader, you know that I’m a big proponent of finding a good tax pro: I even use a CPA. However, beginning in 2018, line 22 on your Schedule A is no more and tax preparation expenses will no longer be deductible. Ditto for expenses related to certain legal and tax advice. So here’s some advice that you don’t have to pay for: If you generally deduct tax and legal fees, take advantage of the opportunity to do so in 2017. Pay any outstanding bills now (your tax pro or lawyer will thank you) and ask whether any fees are payable in advance: I’ve heard that some companies are offering this as an option. Even if you’re not ready to figure your taxes for next year, consider setting up a planning meeting now.
And business owners, you can breathe a sigh of relief: You can still deduct the costs of tax preparation and advice – some of you are really going to need it with the new pass-through rules (You’ll find an explainer here).
10. Get Married. Okay, so maybe getting married isn’t exactly low stress. That may depend on who you are and who you’re marrying. And I would be the last person to tell you to get married just for tax reasons. But if you were thinking about getting married, keep in mind that this tax reform bill is pretty marriage-friendly. The expanded Child Tax Credit, for example? Your options for income limits are married “and all other taxpayers.” In fact, the numbers under the new law are overall advantageous for many married couples and not necessarily as advantageous for singles or heads of household. Again, I’m not saying to run to the altar just to save on your tax bill but if you’re having the “Should we or shouldn’t we?” conversation, be sure to consider finances in your discussions. And if it helps, go see your lawyer or tax pro – best before year-end to nab the deduction (see #9) for more guidance on the numbers.
Of course, I’m not saying you should do all of these things. Or any of them. I don’t know what your personal circumstances are exactly – and those details matter. I don’t believe that you should plan your life around the potential tax consequences. But you should consider how you can take advantage of tax breaks which might be available to you. You shouldn’t pay more in taxes than you need to. If you’re looking for those revised 2018 tax rates under tax reform, you’ll find them here. For the 2017 numbers, click here.