10 tax planning tips for an uncertain environment

Published
  • November 26 2017, 12:03pm EST
As 2017 draws to a close, the uncertain tax and legislative environment means that year-end tax planning is more important than usual. The possibility of major tax reform in the next several months opens up powerful planning opportunities that can save on tax if completed before year’s end. To help individuals and businesses prepare for filing season, Grant Thornton LLP has released a collection of Year-End Tax Guides for 2017 and 10 important tips.

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As 2017 draws to a close, an uncertain tax and legislative environment means that year-end tax planning is more important than usual. The possibility of major tax reform in the next several months opens up powerful planning opportunities that can save on tax if completed before year’s end.

“The potential for tax reform makes year-end tax planning more important than ever for individuals and public and private companies,” said Dustin Stamper, director in Grant Thornton’s Washington National Tax Office, in a statement. “Tax filers should look for ways to accelerate deductions into 2017 while rates are high, and defer income into future years when rates might be lower.” He also stressed that the potential to lose deductions or tax incentives as part of tax reform should also factor into year-end planning. “It’s important to remember that good tax planning goes beyond what has happened. You also have to account for what may happen in the months to come.”

To help individuals and businesses prepare for filing season, Grant Thornton LLP has released a collection of Year-End Tax Guides for 2017 -- and in the meantime, here are 10 of the most important 2017 tax planning considerations for individuals:

1. Accelerate deductions and defer income

Deferring tax is usually a good strategy simply for the time value of money. This year it’s even more important. Taxpayers want to use deductions now while rates are higher and defer income into future years when rates might be lower. There are plenty of income items and expenses they may be able to control. They should consider deferring bonuses, consulting income or self-employment income. On the deduction side, they may be able to accelerate state and local income taxes, interest payments and real estate taxes.

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2. Use itemized deductions before they’re gone

Tax reform threatens many itemized deductions, including the deductions for state and local taxes and medical expenses. If possible, taxpayers should consider paying expenses now while they can still use the deduction. They can often prepay 2017 state taxes even if they aren’t due until next year. Taxpayers can also often control the timing of costly non-urgent medical procedures. But remember some expenses can’t be deducted unless they exceed a certain percentage of the taxpayer's adjusted gross income. Medical expenses generally can’t be deducted unless they exceed 10 percent of AGI (7.5 percent for taxpayers age 65 and older).

3. Leverage state and local sales tax deduction

If a taxpayer is deducting state and local taxes, they need to remember that they can elect to deduct state and local sales tax instead of state income taxes. This is valuable if they live in a state without an income tax, but can also provide a bigger deduction in other states if they made big purchases subject to sales tax (like a car, boat, home, or all three). The IRS has a table allowing them to claim a standard sales tax deduction so they don’t have to save all of their receipts during the year. This table is based on their income, family size and the local sales tax rate, and they can add the tax from large purchases on top of the standard amount. If they already know they will make this election for 2017, they should consider making any planned large purchases before the end of the year in case the election is unavailable or doesn’t make sense next year.

4. Consider charitable deductions now

The charitable deduction deserves special consideration because taxpayers have complete control over its timing. Lawmakers have promised to retain it as part of tax reform, but they could still apply limits. Even if it is left untouched, it might not be valuable next year for many taxpayers. Lawmakers are proposing to double the standard deduction, meaning fewer taxpayers will itemize deductions in the future. If they don’t itemize deductions, they can’t deduct charitable gifts. They should consider accelerating gifts into this year. Also, the deduction may be more valuable against today’s higher rates; however they must be careful because there are AGI limits on deductions.

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5. Get their charitable house in order

If taxpayers do plan on giving to charity before the end of the year, remember that a cash contribution must be documented to be deductible. If they claim a charitable deduction of more than $500 in donated property, they must attach Form 8283. If they are claiming a deduction of $250 or more for a car donation, they will need a contemporaneous written acknowledgement from the charity that includes a description of the car. Remember, they cannot deduct donations to individuals, social clubs, political groups or foreign organizations.

6. Make up a tax shortfall with increased withholding

Don’t forget that taxes are due throughout the year. Taxpayers should check their withholding and estimated tax payments now while they have time to fix a problem. If they’re in danger of an underpayment penalty, they should try to make up the shortfall by increasing withholding on their salary or bonuses. A bigger estimated tax payment can leave them exposed to penalties for previous quarters, while withholding is considered to have been paid ratably throughout the year.

7. Leverage retirement account tax savings

It’s not too late to increase contributions to a retirement account. Traditional retirement accounts like a 401(k) or individual retirement accounts still offer some of the best tax savings. Contributions reduce taxable income at the time that they are made, and tapayers don’t pay taxes until they take the money out at retirement. The 2017 contribution limits are $18,000 for a 401(k) and $5,500 for an IRA (not including catch-up contributions for those 50 years of age and older, which can amount to additional $6,000 for 401(k) and similar plans, and $1,000 for IRAs).

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8. Document business activities

Taxpayers may not need to pay a 3.8 percent Medicare tax on their business income if they participate enough in the business that they are not considered a “passive investor.” Participation is defined as any work performed in a business as an owner, manager or employee as long as it is not an investor activity. Even so, they must document their activities, and the IRS will not let them make ballpark estimates after the fact. Make sure they document the hours they're spending with calendar and appointment books, e-mails and narrative summaries.

9. Take a closer look at state residency status

For individuals who split their time in two different states throughout the year, now is an excellent time to consider where they may be taxed as a resident for 2017. To make it more likely that the high-tax jurisdiction will respect the move and not continue to tax them as a resident, they should track the number of days they are spending in each jurisdiction. Generally, if they reside in a state for 183 days or more, that state will assert residency and the ability to tax all of their income. Furthermore, if they move to a new state but maintain significant contacts with the old state (including driver’s license, residences, bank accounts and the like), they could run the risk of being taxed as a resident in the old state.

10. Tread carefully with estate planning

Normally, taxpayers want to make sure they don’t waste their annual $14,000 gift exclusion. This means making gifts to heirs before the year ends. The possibility of estate tax repeal makes planning a little more complicated this year. It still makes sense to use their exclusion amounts because the estate tax may not be repealed after all and there is no tax cost to using the exclusion even if it is. But they may want to avoid using giving strategies that actually involve paying gift tax until after the legislative outlook is resolved.