Year-end tax planning can provide most taxpayers with a good way to
lower a tax bill that will otherwise be waiting for them when they file
their 2017 tax return in 2018. Since tax liability is primarily keyed to
each calendar tax year, once December 31, 2017 passes, your 2017 tax
liability for the most part – good or bad – will mostly be set in stone.
Year-end 2017 presents a unique set of challenges for many taxpayers because of current efforts by Congress and the Trump Administration to enact tax reform legislation, the scope of which has not been seen since 1986, according to supporters. Whether this ambitious plan will be successful by the end of this year remains uncertain; but the reasons to prepare to maximize any benefits if it does happen are indisputable. Both talk of lower tax rates, and fewer deductions, requires careful monitoring at this time, with “contingency” plans ready to go before year-end should these changes occur.
Tax reform, although important, is not the only reason to engage in year-end tax planning this year. Other changes in the tax law, made by the IRS and the courts, have already taken place in 2017. Opportunities and pitfalls within these recent changes–as they impact each taxpayer’s unique situation—should not be overlooked. This particularly rings true as we approach year-end 2017.
Data gathering. Year-end planning – with or without the prospect of tax reform– should start with data collection and a review of prior year returns. This includes losses or other carryovers, estimated tax installments, and items that were unusual. Conversations about next year should include discussions of any plans for significant purchases or dispositions, as well as any possible life cycle events.
Bunching strategies. Certain items are deductible only to the extent they exceed an adjusted gross income (AGI) floor; for example, aggregate miscellaneous itemized deductions are deductible only to the extent they exceed two percent of the taxpayer’s AGI. Thus, year-end and new-year tax planning might consider ways to bunch AGI-sensitive expenditures in a single year, so that particular deductions exceed their applicable floors and the taxpayer’s total itemized deductions exceed the standard deduction.
Life-cycle changes. External influences such as changes in the tax law, however, may be only part of the reason for taking some action before year’s end. Changes in your personal and financial circumstances – marriage, divorce, a newborn, a change in employment, a new business venture, investment successes and downturns – may require a change-in-course tax-wise since last year. As with any ‘life-cycle” change, your tax return for this year may look entirely different from what it looked like for 2016. Accounting for that difference now, before year-end 2017 closes, should be an integral part of your year-end planning.
Timing rules. Effective year-end tax planning by its nature requires the correct execution of specific timing rules under the tax code. Due especially to the current uncertainties surrounding tax reform, taxpayers must be particularly nimble and prepared to implement timing strategies well into December.