Getting Ahead of Tax Time

These year-end financial considerations can help you manage your coming income tax bill. By Mark J. Gilbert, CPA, PFS | Fall 2017



While the best planning starts with a new tax year and continues throughout it, those of us who slacked off can still reap some year-end tax reduction rewards. The final quarter of the calendar year is a good time to turn your attention to some last-minute income tax planning.

Here are some of the areas that I believe are especially important to focus on.

Inflation Adjustments

Inflation is back on the rise, but inflation-adjusted benefits and provisions have only risen slightly—less than one percent over their 2016 levels. Still, you should be aware of using the increases to your benefit when reviewing income amounts qualifying for the standard deduction, alternative minimum tax (AMT) exemption, earned income tax credit (EITC or EIC), foreign earned income exclusion, and the estate and gift tax exclusion. In addition, be sure to check the IRS’ guidelines; income limits have increased for the tax rate schedule, the limit on itemized deductions, AMT applicability, and the lifetime learning credit.

Disappearing Deductions

To the dismay of some of you, the 2017 tax year has seen several specific deductions change or disappear altogether.

1. Itemized Medical Expense Deduction
Beginning in 2017, taxpayers age 65 and older are subject to an adjusted gross income (AGI) threshold of 10 percent, up from 7.5 percent. Let’s say you have an AGI of $50,000. You’ll now need to have medical expenses of at least $5,000 to deduct the costs, and even then, you can only deduct the amount exceeding $5,000. Therefore, if you’re older than 65, you could consider accelerating medical procedures and payments into 2017 unless it’s clear that you won’t exceed the new, higher threshold.

2. Mortgage Deductions
Unfortunately for taxpayers carrying private mortgage insurance (PMI), the premiums are no longer tax-deductible. If you needed another reason to eliminate costly PMI payments, here it is.

Also beginning in 2017, mortgage debt that’s forgiven by a lender in a short sale or foreclosure is no longer excluded from the taxpayer’s taxable income. Any taxpayer in this situation could be facing a large tax payment in April 2018 and may want to explore ways to soften the blow, like making estimated tax payments in 2017, if possible.

3. Tuition and Fees Deduction
Student loan debt is plaguing the nation and it just became a little more painful for some. The tuition and fees deduction of up to $4,000 in qualified education expenses for the taxpayer or eligible dependent was eliminated for tax years beginning with 2017.

4. Energy-Efficient Home Improvement Tax Credits
Most of the energy-efficiency tax credits expired at the end of 2016. Going forward, solar energy systems are the only energy-saving and renewable energy sources eligible for a federal tax credit, which is equivalent to 30 percent of the purchase price through 2019, 26 percent through 2020, and 22 percent through 2021.

Unchanged Considerations

Despite some popular tax deductions being eliminated, there are still several ways to actively manage or reduce your income tax bill. Below are a few that I often recommend.

1. Contributing to Retirement Plans
Automatic payroll deductions deposited into your self-managed or employer-sponsored retirement plans, like a 401(k), 403(b), SAR-SEP, SIMPLE IRA, etc., defer your taxable income and lower your tax bill. I advise contributing as much as you can afford to, but do consider contribution limits. The $18,000 limit ($12,500 for SIMPLE plans) is an aggregate annual limit by person, not by plan. So, if you work for more than one employer or have more than one account type, monitor and adjust your overall contributions to avoid exceeding the limits.

2. Making Charitable Contributions
The U.S. stock market’s rally during the first half of 2017 may make charitable contributions an appealing tax-reduction strategy. In fact, instead of selling investments to raise cash for making a charitable contribution, investors could consider donating shares of stocks, mutual funds, and other securities that have appreciated in value. Why would you want to do this? You’ll avoid paying capital gains tax on the appreciation of the investments, and you’ll be entitled to a charitable contribution deduction for the full value of the securities—just make sure the charity you want to support can accept in-kind transfers of the investments you wish to donate. Since these types of transactions can take several days or longer to complete, it’s best to not wait until late in December to do this.

3. Minding Capital Gains
There’s a reasonably strong chance that actively managed mutual funds will make robust distributions of capital gains this year, generating a tax liability for anyone holding them in a taxable investment account. If you’re a mutual fund investor, I recommend familiarizing yourself with their estimates of capital gains distributions before year-end. If you find that your investment funds are generating meaningful gains, consider adjusting your payroll withholding or setting aside funds to cover the higher capital gains tax coming your way. If you wish to sell your appreciated mutual fund shares ahead of the capital gains distributions to capture the higher share price, know that the sale itself will also generate capital gains tax. Here’s where the practice of tax-loss selling, the strategy of selling your losing securities to offset any realized capital gains, becomes an effective tool for reducing taxes throughout the tax year.

With meaningful tax reform remaining elusive, I believe 2017 will end up being a year in which traditional tax planning, which typically focuses on deferring income and accelerating deductions and losses, remains a prudent course of action for taxpayers. Only time will tell, but only you can make your money work harder— start thinking ahead.

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An active Illinois CPA Society member, Mark J. Gilbert, CPA, PFS heralds more than 25 years of accounting, finance, and personal financial planning experience as a principal at Reason Financial Advisors Inc.