The New U.S. Tax Bill: Actions to Take Before Year-End
Within a few days, we expect the new U.S. tax law to pass with most provisions effective next year. Given the widespread loss of allowable deductions on Schedule A and the near doubling of the standard deduction next year, in many cases, it is best to accelerate deductions into this year.
Deductions Reduced Next Year
Property and state income tax deductions will be limited to $10,000 combined. If you expect to have over this amount, make your next property tax payment now rather than waiting until next year.
Nearly all Miscellaneous Itemized deductions disappear next year. Consider paying your tax preparer and investment advisor now for services performed this year, but not normally billed until 2018 – the same for unreimbursed business expenses.
Note that if you are in the Alternative Minimum Tax (AMT) this year, then the above actions will not benefit you and thus no action is needed this year. AMT can be found on line 45 of your Form 1040.
Charitable deductions are still allowed for both regular and AMT taxes. However, with the standard deduction increased to $24,000 for married couples and $12,000 for individuals, much of the tax benefit for charitable deductions is reduced or gone.
Example (deductions allowed on Sch. A for married filing jointly):
| 2017 | 2018 | |
| Property & State Taxes | $25,000 | $10,000 |
| Residence Mortgage | $5,000 | $5,000 |
| Itemized Deductions
(Subject to 2% AGI) |
$15,000 | $0 |
| Charitable Deductions | $5,000 | $5,000 |
| Total Allowed Deductions | $50,000 | $20,000 |
In the above example, for 2018 the standard deduction of $24,000 will exceed the itemized deductions, thus the itemized deductions for 2018 are irrelevant and will remain so unless they exceed $24,000. As a result, the $5,000 of charitable contributions made in 2018 will not reduce federal income taxes at all. For 2018, the charitable contributions would have to exceed $9,000 to reduce income taxes further and only the charitable contributions above $9,000 would be tax advantageous.
The best strategy for those with low mortgage interest expense is to make charitable contributions in 2017 before the new tax law takes effect. The use of a Donor Advised Fund (DAF) is a good way to make the charitable contribution this year while allowing you to dispense the funds in future years. For example, using Schwab’s DAF and putting $30,000 (or any other amount) into it gives you a charitable deduction in full this year. Then payments from your DAF fund can be paid to charities of your choice in future years in amounts that you choose. If you don’t already have a DAF, you have just over a week to get one set up and funded, so it is not too late if you move quickly. Call WESCAP for assistance if this is of interest to you.
Other actions to consider for those in a low 2017 tax bracket are to do Roth IRA conversions and additional asset sales with gains from taxable accounts.
There are other tax related strategies that are less time sensitive which we will discuss at another time.
If you have any questions regarding the best course of action for your particular circumstance, talk to your tax advisor and we will be glad to discuss ideas with you as well. Please have your last tax return on hand if you decide to contact us.
Sincerely,
The WESCAP Team