On Friday, December 22nd, President Trump signed the Tax Cuts and Jobs Act of 2017 into law. Here are some 9 steps to consider taking prior to 12/31/17 and then during 2018 to minimize your federal tax liability.
- Prior to 12/31/17, pay all of your 2017 state taxes that will ultimately be due next April as a Q4 estimated tax payment, and prepay your 2018 real estate taxes prior to 12/31/17 as well. Remember, the total you can deduct for state income taxes and real estate taxes is capped at $10k starting in 2018. Please note that this strategy won’t work if you are subject to the Alternative Minimum Tax (AMT). Take a look at line 45 of your 2016 Form 1040 to see if you paid the AMT last year. If your income and deductions this year will be similar to 2016 and you triggered the AMT last year, paying additional state and local taxes prior to 12/31/17 most likely won’t save you any taxes this year. It’s like pouring water into a full bucket.
- Prior to 12/31/17, make charitable donations that you would otherwise make during 2018. With the standard deduction for married couples increasing to $24k in 2018 and the state and local tax deduction capped at $10k, only married couples with a high mortgage, who donate a lot to charity, and/or have substantial medical expenses will itemize their deductions going forward. Keep in mind that you need to itemize to save any taxes on the donations made during the year. Single individuals are more likely to itemize under the new rules since their standard deduction is only $12k and like married couples, can deduct $10k in state and local taxes. (Can you say marriage penalty????) Even so, with tax rates decreasing next year, single individuals will save taxes with this strategy too.
- Pay any and all unreimbursed employee business expenses and your financial planning/investment management fees/tax prep fees before 12/31/17 provided you are not subject to the AMT and these expenses in the aggregate will exceed 2% of your income, as these deductions will be lost in 2018.
- Pay your qualified moving expenses prior to 12/31/17, since the moving deduction is no longer allowed between 1/1/18 – 12/31/25. Moving expenses include the cost of moving your household items and the cost of traveling to your new home, as long as the distance between your old home and your new job is 50 miles further than the distance between your old home and your old job.
- Pre-pay and pay off your medical bills by 12/31/17 if your total medical expenses exceed 7.5% of your income and you will itemize in 2017. The new tax rules actually reduce the threshold to deduct your medical expenses from 10% of your Adjusted Gross Income (AGI) to 7.5% of AGI for 2017 and 2018.
- Defer any last-minute taxable Roth conversions until 2018, when the tax rates will be lower. Please note that taxpayers are no longer allowed to recharacterize a Roth conversion back to a traditional IRA beginning in 2018, so be careful to understand how much of the Roth conversion will be taxed. There are strategies to minimize the tax on a Roth Conversion that we have written about in prior newsletters, including transferring the taxable portion of the IRA account into a 401k or 403b at work, or into a Solo 401k, and then converting the remaining post-tax dollars into a Roth IRA.
- Finalize your divorce by 12/31/18 if you will end up paying alimony, since alimony will no longer be deductible for divorce agreements finalized after 12/31/18.
- If you own a practice and also own the office space used by the practice, consider raising the rent the practice is paying to the absolute highest reasonable amount. The new 20% deduction on Qualified Business income is not phased out for real estate profits, but is phased out on the income earned from qualified services businesses (including healthcare) for single individuals with income between $157.5k and $207.5k and married couples with income between $315k and $415k. Another option might be to set up a separate entity to own the equipment for your practice and then lease the equipment back to the practice. We’ll have to wait to see how these regulations are written to figure out what makes the most sense for practice owners.
- Practice owners should purchase sports and theater tickets used for marketing prior to 12/31/17 since money spent for business entertaining is no longer tax deductible in 2018. Purchasing these these items by credit card before 12/31/17 still counts, even if the credit card is not paid off until 2018. Allowable business meals continue to be 50% deductible under the new rules.
As these rules were just signed into law on 12/22/17, there will be a lot of analysis required to fully understand the strategies available to be able to minimize your taxes for the years to come. Please stay tuned.