Year-End Tax Planning with Tax Reform on the Horizon

John J. FureyOctober 26, 2017


A client asked: “What should I do in 2017 to plan for the possibility of tax reform in 2018?”

The Republican Party released its Tax Reform Framework (Framework)on September 27, 2017. Congress will be proposing tax reform legislation shortly that will provide more details. Republican’s goal is to have tax reform legislation passed no later than early 2018. Any new rules arising from the tax reform legislation will likely not be effective until 2018. In the interim the current tax rules are effective for calendar 2017.

It is impossible to know what will be included in the final tax reform legislation, but based on what has been proposed there are some steps you may want to take in 2017. Here are some of the proposals that may change your taxes, and what you can do as an individual taxpayer in 2017 in anticipation of such changes.

Maximize your Itemized Deductions in 2017

  • One of the most significant changes may be the limitation of expenses that can be deducted from your Adjusted Gross Income to arrive at your Taxable Income.
  • The Framework calls for the elimination of most Itemized Deductions, but retains the deductions for mortgage interest and charitable contributions. One earlier proposal suggested a cap on deductions of $100,000 (single) and $200,000 (married). The Framework seemed to provide for the elimination of the deductions for state and local income taxes and real estate taxes. However, there is the possibility that the deduction for such taxes may be preserved, but with possible limits on how much can be deducted. There is a strong probability that Itemized Deductions will be limited in some way.
  • In addition to the limit on what expenses can be deducted, the Standard Deduction may be significantly increased. It may go from $6,500 to $12,000 (single) and from $13,000 to $24,000 (married) in 2018.
  • The increase in the Standard Deduction combined with the limitations on Itemized Deductions may result in your Itemized Deductions in 2018 being less than the Standard Deduction. If that happens, then any Itemized Deductions that you pay in 2018 will not reduce your tax liability.
  • Because you are a cash basis taxpayer any expenses that you pay no later than December 31, 2017 can be deducted on your tax return for 2017. If you pay an amount by credit card in 2017, the entire amount is tax deductible. If you can legitimately pay for the following Itemized Deductions in 2017, you may want to do so to maximize you tax savings:
    • Medical expenses (must exceed 10% of Adjusted Gross Income to be deductible)
    • Estimated payments for any state or local taxes
    • Payments for real estate taxes
    • Mortgage payment for January 2018
    • Charitable contributions
  • If you are subject to the Alternative Minimum Tax, the early payment of your state or local income taxes and real estate taxes may not reduce your tax liability in 2017.
  • If you think that your Itemized Deductions may be lower than the proposed Standard Deduction in 2018 and you make charitable contributions, you may want to consider establishing an individual charitable donor advised fund in 2017. For example, if you contribute $10,000 to the fund in 2017, you can deduct that amount on your tax return. If you are in the 25% marginal tax bracket, you could reduce your taxes by $2,500. You have complete control over what organizations receive donations from the fund and when the donations are made. Contributing highly appreciated securities to the fund is a very effective way to reduce your taxes. Here is a link to information about Schwab’s donor advised fund.
  • The tax brackets may go from seven (10%, 15%, 25%, 28%, 33%, 35% and 39.6%) to three (12%, 25% and 35%). There is the possibility that a fourth tax bracket will be added for high-income taxpayers. The amount of Taxable Income that will be taxed in each bracket will be in the proposed legislation. If your marginal tax bracket decreases in 2018, any Itemized Deductions that you pay in 2017 will result in higher tax savings.

Maximize your before-tax contributions to your 401(k) Plan or other retirement plan in 2017

  • One area being looked at by Congress to raise more current tax revenue to pay for proposed tax cuts is imposing a limit of $2,400 on the amount that can be contributed to retirement plans on a before-tax basis. Here is an article that addresses the possibility of a limit.
  • In 2017, you can contribute on a before-tax basis up to $18,000 (under age 50) or $24,000 (age 50 and over) to a 401(k) plan or similar retirement plan. The amount contributed is not included in your wages for income tax purposes.
  • After tax reform, you may still be able to contribute $18,000 to your 401(k) Plan, but $15,600 ($18,000 minus $2,400) may have to be contributed on an after-tax basis to your Roth 401(k) account in the Plan. That means the $15,600 would be included in your taxable wages. Any distributions from your Roth 410(k) account are not subject to federal taxes.

Other tax rules that may change

Here is a list of some of the other tax rules affecting individual taxpayers that may change:

  • Elimination of the deduction for personal exemptions and an increase in the Child Tax Credit
  • Repeal of the Alternative Minimum Tax
  • Elimination of certain other exemptions, deductions and credits for individual taxpayers
  • Repeal of the estate tax and generation-skipping transfer tax

If you have any questions about Itemized Deductions, retirement plan contributions or other tax issues, please do not hesitate to contact our office (610-651-2777). We are happy to help!