Where has the year gone? The holiday season will soon be in full swing and you may not give year-end tax planning the attention it deserves. Too often taxes are only thought of when they need to be paid or when a tax return needs to be filed; this can be costly. There could be actions to take before year-end to minimize your tax bill or to take advantage of a unique tax situation you are in.
Where Do You Stand in 2017? Know Your Estimate of Taxable Income
It’s imperative that a year-end tax projection be done to see where 2017 income stands to arrive at an estimate of taxable income. The projection is the starting point to see what the tax is on the next dollar of income or what the tax benefit is on the next dollar of deduction. Due to the alternative minimum tax (AMT) and certain phase-outs you cannot assume that your next dollar of income or deduction will be at your marginal tax rate. For example, many taxpayers in the $200,000 to $300,000 income range fall into a marginal tax rate of 25% to 28%, but, most taxpayers in this income range actually pay tax at a 35% rate on an additional dollar of income because they are subject to the AMT and phase-out of the AMT exemption.
Here are just a few of the questions to address with year-end planning:
- Should I accelerate income? Or defer?
- Am I subject to the Alternative Minimum Tax? Am I in the “phase-out range” of the AMT exemption?
- Should I give more to charity this year? Or is next year better? Should I consider a donor advised fund?
- Have I paid in enough tax to protect me from underpayment penalties? What can I do if I haven’t?
- Should I make large equipment purchases this year or next? How much can I buy and write off 100%?
- If I’m going to owe state income taxes, is there a benefit to paying before 12/31?
- Am I utilizing all of my deductions? What can I do if I am not?
- Should I realize capital gains? Should I realize capital losses? How much? Short-term or long-term?
- Does a Roth IRA conversion make sense? How much?
- Should I convert some of my 401(k) to Roth 401(k)? Can I?
The above are some of the more common questions that your tax advisor can answer for you. There are many more items to consider based on a taxpayer’s unique situation.
To get started you should provide your tax advisor with your 2017 information (mainly what has changed from 2016, assuming they have your 2016 return). They can run a projection and analyze some “what-if” scenarios in order to discuss year-end moves to consider.
Possible Tax Reform in 2018
Year-end planning for 2017 brings with it some extra analysis in light of possible tax reform on the horizon. The possibility of lower tax rates could help strengthen a decision to defer income and accelerate deductions. A possible elimination of the AMT is another consideration. Possible changes to the standard deduction and itemized deduction limits may promote accelerating deductions (such as charitable gifts, including gifting to a donor advised fund) to maximize tax benefits.
How DHJJ Can Help
Missed opportunity can be costly, but seizing opportunity can yield great benefits. Don’t delay; get your 2017 tax planning done today!