President Trump and Congress are focused on completing a tax bill prior to year-end. Unfortunately, their timing may require quick action to implement a tax strategy in 2017 that can take advantage of the 2018 changes. What’s a taxpayer to do?
It’s practically mid-December and we still don’t know what the tax landscape will look like in 2018. That makes it doubly difficult for 2017 tax planning. Will you receive a significant tax cut in 2018? Or, will you lose the tax deductions you now enjoy? What’s the best course of action for not leaving money on the table when you don’t know what’s coming down the road? Here are some key points to keep in mind as you determine what tax strategies to implement in 2017.
Tax Rate Roulette
Until Congress passes the new tax law, gauging whether your marginal income tax rate will be higher this year or next year, may be difficult. But think about it this way: Do you want more net taxable income this year or next? If you think your 2017 tax rate will be higher than your 2018 tax rate, then searching for deductions in 2017 is an appropriate strategy. If you think your tax rate will be higher in 2018, you will want to consider pushing some of those voluntary deductions forward to next year to decrease your 2018 income.
This strategy could be especially important for pass-through businesses (businesses not subject to corporate tax). They could see their tax rates fall from 39.6 percent in 2017 to below 30 percent in 2018. Business owners should consider accelerating expenses into 2017 and delaying income until 2018. Using this strategy could save an extra 10 percent or more!
Gambling on Giving
A few years back, Congress passed a law in January regarding charitable contributions from IRAs and made it retroactive to December of the previous year. If you were clairvoyant and acted upon it before the end of the prior year, you were able to take advantage of the tax benefit. Anyone who couldn’t predict Washington’s actions was out of luck. Hopefully, that won’t be the case this time round!
We recently wrote about ways you can make your charitable gifts more beneficial. Given the likelihood that the standard deduction will increase in 2018, many taxpayers will no longer be itemizing their tax returns after 2017. That means they may lose their itemized tax deductions from charitable contributions next year. This doesn’t mean you should stop giving to charities. But it does mean you may want to give more this year to receive a tax deduction. I promise your favorite charitable organizations won’t mind receiving your money early!
Roth IRAs: Convert Now or Later?
If you convert Traditional IRA monies to a Roth IRA, you will pay ordinary income tax on the conversion amount. Therefore, the smart decision is to convert more monies in whichever year places you in the lower income tax bracket. For many taxpayers, this could be 2018. Regardless, of the year you convert your money, the best benefit is that once in the Roth IRA, your money grows tax free!
Your Heirs May Win
Currently, upon his or her death, each person can pass assets worth $5.49 million to heirs federal estate tax free. The new tax law proposal includes a significant increase in this amount. If your estate is worth more than $5.49 million ($10.98 for married people), holding off the Grim Reaper until after New Year’s Day could save your estate thousands or even millions in taxes.
While no one likes to think about death – especially during the holidays – it is very important that you review your estate plan whenever estate tax laws change. So, put this on your list of "to-dos" for 2018.
All you can do in a situation like this is to give it an educated guess and adapt as more information becomes available. As always, you’ll want to consult your tax advisor prior to implementing any tax planning strategies.
Bill Wendling, CFA, is a Senior Portfolio Manager with Bedel Financial Consulting Inc., a wealth management firm located in Indianapolis. For more information, visit their website at bedelfinancial.com or email Bill.