2017 Year End Tax Planning

2017 Year End Tax Planning

December is always a good time to evaluate your tax situation and see what you can do to lower your taxes.  This year is no different but with the potential tax reform it is more important than usual. With the recent passage of tax reform bills in the house and the senate, Congress is now working on what the final law will be.  We think it is likely that a tax reform bill will pass this year, but there may not be a lot of time to react by the time the final law passes.

Since the senate and house bills have some similarities, we have a sense of what the final law may look like. To prepare for the eventuality of a new tax law, there are several things you can consider now to help make the most of your tax planning for 2017 and 2018.

This article intends to address the most common things that will affect individual taxpayers and their year-end tax planning for 2017.

One of the major changes in the tax law may be the elimination of many itemized deductions that are allowed under current law. However, the standard deduction will likely be doubled for most people. With this change, it is predicted that the number of people who will be able to use itemized deductions in 2018 and forward will decrease dramatically.

Specifically, the deduction for state and local income taxes may be eliminated, the deduction for real estate property taxes may be capped at $10,000, and the deduction for miscellaneous deductions over 2% of your Adjusted Gross Income (“AGI”) may be eliminated (e.g. investment advisor fees, tax preparation fees, unreimbursed business expenses, etc.). In addition, the deduction for medical expenses over 10% of AGI could be eliminated, however, there is talk that this deduction could remain.  The itemized deductions for mortgage interest, a limited amount of property taxes and charitable donations will probably remain.

The standard deduction will probably increase from $12,700 for a married couple to $24,000, and the standard deduction for a single filer will increase from $6,350 to $12,000. Starting next year, many people will not have enough itemized deductions to reach these limits and will take the standard deduction instead.

Another major change proposed in the House bill is the elimination of the alternative minimum tax also known as the “AMT”.

One of the biggest items in the tax reform is lower tax rates. In general, it appears that tax rates will be lowered across the board for all levels of income.

Here are some basic things you should consider doing before December 31, 2017 to prepare for the ultimate tax reform:

·         State Taxes:  Consider paying all of your 2017 state tax liability before the end of this year. This includes your 4^th quarter state estimated tax payment and any estimated amount you might owe in April next year for the 2017 tax year.  If you are subject to AMT in 2017, you may not get a federal benefit from paying in 2017, but if the deduction is going away, you wouldn’t get a benefit in 2018 anyway. In addition, you may still benefit from the deduction on your 2017 state taxes.

·         Real Estate Taxes: Considering that there may be a $10,000 cap on the deduction for real estate taxes in the future, you may want to pay any remaining real property taxes for 2017 before year end. If you are subject to AMT in 2017, you may not get a benefit for the deduction on your federal taxes. However, you may get a benefit on your state tax return. It’s best to check with your tax advisor.

·         Charitable Contributions: Increase your charitable deductions in 2017 for future years.  One way to do this is to set up a Donor Advised Fund (“DAF”) for charity.  You can donate as much as you want in 2017, subject to certain tax deduction limits, and then have the DAF disburse funds to your desired charities over the next several years.  If you have appreciated stock that you can donate, this is a double tax savings.  You will be able to deduct the FMV of the stock donated on your tax return and won’t be taxed on the capital gain.

·         Miscellaneous itemized deductions: Consider paying your 2017 advisor fees and unreimbursed business expenses before year end.  These include your unreimbursed business expenses for your job, tax preparation fees, estate planning fees, and investment advisor fees.  If your miscellaneous itemized deductions are over 2% of your AGI, and you are not subject to the AMT, you will be able will increase your 2017 deductions.  

·         Mortgage Interest: Consider paying your January 2018 mortgage payment just before year end to deduct the interest portion of the January payment in 2017.

·         ROTH IRA Conversions: Roth Conversions may be gone in 2018.  If you want to do a Roth conversion or increase your ordinary income in 2017 to match your itemized deductions, you will have to do the conversion before 12/31/17.

·         Business expenses: If you own your own business consider accelerating your 2017 business expenses by prepaying some of your 2018 expenses before year end.

·         Income deferral: With tax rates looking like they will be lower next year, you may want to consider, if possible, deferring any income into 2018.

·         Alimony deductions: The alimony deduction may be eliminated for divorces occurring in 2018 and beyond.  Divorce decrees executed before 12/31/17 will be grandfathered and the alimony deductions will continue to be deductible.

·         Incentive Stock Options (ISOs):  In 2018, the AMT may be eliminated.  Under the current law, when ISOs are exercised, the inherent gain on the stock is income for the AMT if held for long term purposes. If there is no longer AMT, this will no longer be an issue.  So it would be best to wait until 2018 or later to exercise your ISOs.

·         Investment gains:  The Senate bill proposes that going forward, investment cost basis will be calculated using the First In, First Out (FIFO) method rather than a Specific Identification method.  You will no longer be able to choose which specific shares will be sold.  If you have stock with lower and higher cost basis, you may want to sell the higher cost basis stock before year end using the Specific Identification method. This will leave only the lower cost basis shares remaining. At least you will have reduced your position in that holding without triggering the much larger taxes due than if you didn’t do this and had to sell some of the holding after 2017. The remaining unrealized capital gains could remain in your portfolio for the long term and your heirs would receive a “stepped up” basis at death.

This article is a summary of our current thoughts on the proposed new tax law and does not necessarily cover everything that may apply. Your individual circumstances will matter, and you should consult your advisors regarding any of the above strategies. This article does not constitute tax or legal advice.

Why you should consider a Health Savings Account now

Why you should consider an HSA now

Health Savings Accounts ("HSAs") have been around since 2003; however, based on my observations, these types of accounts are not widely used.  With the focus on health insurance the past few years, now is a good time to consider the use of an HSA.  If you qualify to contribute to an HSA and have the cash flow, they are a really great tax saving and investment vehicle.

What is an HSA?

An HSA is a type of account that you contribute funds to just like an individual retirement account ("IRA"). Many people are not eligible to make tax deductible contributions to an IRA because of income limitations, participation in employer sponsored plans, etc. Those people can consider an HSA as an alternative. An HSA is one way to reduce your taxes, save for retirement, and save for medical expenses at the same time. When you make a contribution to an HSA, a subtraction from adjusted gross income can be claimed on your tax return. This reduces your adjusted gross income and ultimately the amount of tax you owe. Once the funds are in the HSA, they can be invested or left in cash and are available to pay for medical expenses.

In addition, medical expenses usually do not provide much tax benefit as a normal tax deduction. By contributing to an HSA and using those funds for medical expenses, you are able to indirectly deduct your medical expenses.

Who Can Qualify:

The first qualification is that you must be covered by a “high deductible health plan” or “HDHP”. High deductible is defined as a deductible of at least $2,600 per year for a family or $1,300 for a single person.  In general, as long as you are enrolled in an HDHP and eligible for an HSA as of the first day of the last month of your tax year (December 1^st for most taxpayers), then you are considered enrolled in an HDHP for the entire year.

The second qualification is that you cannot be enrolled in Medicare. If you are enrolled in Medicare, you are not eligible to contribute to an HSA. However, if you already have funds in an HSA, you can continue to use these funds.

The third requirement is that you cannot be claimed as a dependent on someone else’s tax return.

The fourth requirement is that you have no other health coverage (such as a flexible spending account or “FSA”) except what is permitted. See IRS website for further information on this.

Distributions:

Distributions from the HSA often occur as medical expenses. The custodian of the HSA will usually give the HSA owner a debit card to use at medical service providers.  Distributions and payments from an HSA are not taxable if they are used for qualifying medical expenses.  Qualifying medical expenses are those that generally qualify for a tax deduction as a medical expense such as prescriptions, co-pays, hospital and doctor expenses, etc.  Only certain types of insurance payments are allowed as qualifying distributions, so be sure to look into this further if you are planning to use the HSA for payment of health insurance premiums. 

If the HSA funds are not eventually used for medical expenses, the account is allowed to accumulate and grow tax free.  Once the account holder reaches age 65, the funds can be withdrawn for non-medical purposes without being subject to a withdrawal penalty.  Prior to age 65, non-medical distributions will be subject to a 20% penalty.   After age 65, funds withdrawn for non-medical purposes will be subject to income tax on the growth of the investments.

Contribution Limitations:

HSA contributions are subject to annual limitations. The annual contribution for a family in 2017 is limited to $6,750.  The 2017 annual contribution for a single person is limited to $3,400. Those age 55 or older can contribute an extra $1,000.

Where can you setup an HSA?

Many local banks as well as online banks have the ability to establish a health savings account for you. As with anything, you should compare the different banks to determine which one is best for you. In addition, your health insurance provider may provide the ability for you to establish an HSA.

Summary

HSAs are a great vehicle for saving taxes on your medical expenses and possibly saving for retirement at the same time. If you are eligible and can afford to put the money into an HSA, then a health savings account is something for you to seriously consider.

Disclaimer: This article is necessarily general in nature. It is meant to cover the general rules and not the entire details. If you are considering the use of an HSA, be sure to consider all the details and consult your tax professional. The IRS website and HSA websites are also a good source of info