Last-minute tax tips for this season and beyond

As taxpayers and tax professionals race to finish up their tax returns by April 18, or opt to file for an extension, there are still a few last-minute things they can do, along with plenty to think about for next year.

“There’s not a lot of last-minute tax planning that can be done, but there are minimal things, like if you haven’t done an IRA contribution, you can both set up an IRA as well as contribute to an IRA if you’re within the limits of what would be a deduction,” said Greg Rosica, a tax partner at Ernst & Young and a contributing author of the EY Tax Guide 2017. “If you haven’t set the account up yet, it’s probably getting close to when the various custodians will still allow you to do that, but nonetheless that can be done up until April 18, next Tuesday, so that can decrease your taxes as well.”

Tax returns received as of April 7, 2017 by the IRS

Taxpayers and preparers should also take a close look at some of the deductions they are planning to claim.

“You can still pull together things like evaluating your state income tax situation,” said Rosica. “Make sure you have all of the right state tax deductions and payments. If you’re in a low- or no-tax state, make sure you’ve really maximized the amount of sales tax that you can do by looking at your spending for the entire year. There are tables that the IRS provides you, but for most taxpayers those tables aren’t accurate. They’re not going to give you the best answer. Search through your credit card statements and the year-end summary of the credit card statement to look at how much you actually spent. Back out things that are not sales taxable, like groceries and things like that. Then you can make a pretty good estimate based on that as to how much sales tax you paid, which is probably in most cases well in excess of what’s provided in the tables. Digging a little deeper for some deductions that you may be entitled to is something that still can impact your taxes. Even though you can’t change what you’ve already spent, maybe you can refine some of those things, or mine some of those items.”

Those taxpayers who are filing an extension will have some extra time to mull over their tax planning.

“As you’re finishing up ’16 and doing your tax return, it’s a great time to be focusing on what didn’t work great and what wasn’t as deductible as you thought it would be, meaning you maybe didn’t get a full benefit, or maybe you ended up being in alternative minimum tax, AMT, so that took away some of the deductions you thought you were going to get,” said Rosica. “Looking at what happened last year, and trying to change what’s happening this year, can be very effective for people.”

That can be especially true for taxpayers who find themselves subject to AMT.

“Look at the timing of things,” Rosica advised. “If you’re making certain itemized deductions that put you into AMT, maybe you should look at whether you’re going to be in AMT again this year and project that. If you are, then consider not making those payments this year because you’re going to get no tax deduction for it. Payments that are flexible in terms of timing—oftentimes things like real estate taxes, state income taxes that you paid through estimated tax payments—those generally you have flexibility as to which tax year you pay it, so you might not pay those in 2017 and push them off into January of 2018 if it looks like you’re going to be in AMT. That’s important to do.”

He also recommends taking a closer look at capital gains income. “Some people that have a lot of capital gains income and harvest a lot of losses, they may harvest enough losses to offset all their gains, but if they don’t have a lot of other income, then they don’t take advantage of the lower tax brackets,” said Rosica. “You want to make sure you have taxable income when you’re planning so you’re at least paying tax out of the lower tax brackets. I see people sometimes—particularly retired folks that generally don’t have wage income anymore, but they have income from capital gains and dividends— they can offset a lot of their income, which generally isn’t that great. You want to be able to pay income [tax] at the low brackets, the 10, the 15, the 25 percent rate each year. Otherwise if you bunch it into the following year, you’re going to be paying at much higher rates.”

While President Trump and lawmakers in Congress are working on their promised tax reform plans, it’s difficult to be certain what the tax rates and rules will be a year or two from now. That makes tax planning especially difficult this year for tax professionals.

“Because we are in a time of uncertainty as to what the rates will be and when they will change, to the extent that you can put off certain decisions or undo certain decisions, then those can be good strategies,” said Rosica. “If you have a big sale of something coming up, you want to make sure you do it for the right investment or business decision first, but if there’s flexibility as to when that can get paid, when you can realize that, maybe you do that as an installment sale. You can push out when that income is going to come to you. If tax rates actually go down, then you’ve pushed it into the next year or so, and that can be very helpful to you. You can still have the sale, but maybe when you receive the proceeds can change and therefore the tax ramifications can change as well.”

Tax reform could affect certain tax deductions, such as for charitable contributions. “We know what the rules are today, and things aren’t necessarily going to be retroactive,” said Rosica. “They could be, but they typically are not. So taking deductions today when you know we have higher income tax rates can be beneficial. We certainly looked at that last year in ’16, not knowing when we would see things change in ’17, if they would. We knew the top rate was 39.6 percent, and if you could take a charitable deduction that offsets that. It’s worth more at 39.6 percent than it would be at 33 percent if the rates go down to that. Taking advantage of what you know today and what’s certain today can help position you for tax reform changes that might be coming.”

One of Trump’s tax reform proposals involves eliminating the AMT, and some taxpayers might want to plan ahead for that happening. “When you get those types of deductions that might be subject to AMT or eliminated because of AMT this year, if you can push those into next year, you either might not be into AMT because of your tax situation, or the AMT might not even exist, so therefore you wouldn’t be subject to it either,” Rosica suggested.

Tax time is also a great opportunity for tax clients to reevaluate their withholding. “This is a good time to do that if it looks like you’re getting a big refund,” said Rosica. “You want to be controlling that money throughout the year, not the government, so adjust your W-4 if you still get big refunds. If you like the surprise of the refund and the exhilaration from it, that’s fine. Just set up a new bank account and put it in there, and don’t ever look at the statements until April of next year.”

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Tax planning Tax season Tax strategies AMT Tax reform Tax deductions EY
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