As 2017 comes to a close, some consideration should be taken to see what can improve your tax situation. The time-honored approach of deferring income and accelerating deductions to minimize taxes usually applies. This approach may turn out to be even more valuable this year if Congress succeeds in enacting tax reform that reduces tax rates beginning next year in exchange for slimmed-down deductions. What ultimately gets passed is anyone’s guess. We will update you on developments once we see progress that is more concrete. Regardless of whether tax reform is enacted, deferring income also may help minimize or avoid AGI-based phaseouts of various tax breaks that are applicable for 2017.
Effective year-end tax planning must take into account each taxpayer's particular situation and planning goals, with the aim of minimizing taxes. While many taxpayers will come out ahead by following the traditional approach (deferring income and accelerating deductions), others, including those with special circumstances, may want to consider accelerating income and deferring deductions. Most traditional techniques for deferring income and accelerating expenses can be reversed to achieve the opposite effect.
Some of the key considerations to take into account when formulating a year-end tax saving plan include the following:
State Income and Property Taxes- The state income and property tax deductions appear to be at risk. If you have amounts due in early 2018, you should consider prepayments of these in 2017 to secure possible tax deductions on your 2017 tax returns.
Capital gains- Long-term capital gains are taxed at a rate of (a) 20% if they would be taxed at a rate of 39.6% if they were treated as ordinary income, (b) 15% if they would be taxed at above 15% but below 39.6% if they were treated as ordinary income, and (c) 0% if they would be taxed at a rate of 10% or 15% if they were treated as ordinary income. And, the 3.8% surtax on net investment income may apply. Matching capital gains with capital losses is usually done at year end.
Low-taxed dividend income- Qualified dividend income is taxed at the same favorable tax rates that apply to long-term capital gains. The 3.8% surtax on net investment income may apply.
Electing to claim sales and use taxes as an itemized deduction instead of state income taxes- Individual taxpayers have the choice of claiming an itemized deduction for state and local sales and use taxes instead of state income taxes.
Traditional IRA and Roth IRA year-end moves- One can convert traditional IRAs to Roth IRAs. And, one can then "recharacterize" (i.e., elect to treat a contribution made to one type of IRA as made to a different type of IRA) that conversion and can even, possibly, reconvert the recharacterized transaction.
Expensing deduction- For qualified property placed in service in tax years beginning in 2017, the maximum amount that may be expensed under the Code Sec. 179 dollar limitation is $510,000, and the beginning-of-phaseout amount is $2,030,000. Besides taking advantage of the Code Sec. 179 rules, some businesses may be able to buy much-needed machinery and equipment at year-end and currently deduct the cost under a "de minimis" safe harbor election.
First-year depreciation deduction- Most new machinery and equipment bought and placed in service in 2017 qualifies for the 50% bonus first-year depreciation deduction. Bonus first-year depreciation has been extended through 2019 with a number of modifications, including a gradual reduction over that time (bonus depreciation declines to 40% for 2018, and 30% for 2019).
Deduction for qualified production activities income- Taxpayers can claim a deduction, subject to limits, for 9% of the lesser of (1) the taxpayer's "qualified production activities income" for the tax year (i.e., net income from U.S. manufacturing, production or extraction activities, U.S. film production, U.S. construction activities, and U.S. engineering and architectural services), or (2) the taxpayer's taxable income for that tax year (before taking this deduction into account).
Alternative minimum tax (AMT)- Watch out for the AMT, which applies to both individuals and many corporations. A decision to accelerate an expense or to defer an item of income to reduce taxable income for regular tax purposes may not save taxes if the taxpayer is subject to the AMT.
Time value of money- Any decision to save taxes by accelerating income must take into account the fact that this means paying taxes early and losing the use of money that could have been otherwise invested.
Net operating loss- A business with a loss this year may be able to use that loss to generate cash in the form of a quick net operating loss carryback refund.
Energy tax incentives- Tax credits are available for residential energy-efficient solar property placed in service before 2022 (but a gradual phaseout applies).