With tax reform pending, it’s time to take action

“Most people in most brackets will get at least some benefits (from the proposed lower rates).” Mark Luscombe Principal federal tax analyst at Wolters Kluwer Tax & Accounting

Taxpayers who wait until the ink is dry on the sweeping Republican tax-reform plan could leave some money on the table. While the vast majority of changes won’t take effect until January, procrastinators might miss out on key tax breaks before then.

The waning weeks of 2017 are shaping up as a time when year-end planning becomes important, especially for people who won’t be able to take advantage of several key deductions that could disappear. Only about 30% of individual taxpayers currently itemize deductions, and that could drop to around 10% with the proposed changes.

Even for people who continue to itemize, plenty of familiar deductions might no longer be available.

Defer income

As a rule, taxpayers often find it worthwhile to defer income into the next year and take as many deductions and credits as possible in the current year.

“With tax reform, that strategy makes even more sense,” said Mark Luscombe, principal federal tax analyst at Wolters Kluwer Tax & Accounting.

Most people can’t do much to delay salary income. But for those who can ask their employer to defer yearend bonuses or delay their own invoices for a personal business, that income likely will be taxed at reduced rates next year.

“Most people in most brackets will get at least some benefits (from the proposed lower rates),” Luscombe said, referring to House and Senate bills.

To itemize or not

People who itemize might want to focus on deductions that, as of early December, were slated to get cut entirely or scaled back. These include the proposed elimination of the federal deduction for state/local income taxes and a possible new $10,000 annual deduction cap on real estate taxes.

Other itemized deductions likely will continue to be available, but only for people who itemize, such as the deduction for charity donations and that for mortgage interest, which could be scaled back a bit.

Planning opportunities thus might include prepaying a property-tax installment due early in 2018, making a premature estimated state-tax payment or writing an early mortgage check prior to Jan. 1. It could be a time to double-up on charity donations that might not deliver any tax benefits next year, depending on your circumstances. Donations can be made by credit card prior to Jan. 1 and applied for 2017, even if the bill isn’t paid for weeks or months later.

For certain deductions that have thresholds to meet, it can be beneficial to bunch expenses and utilize them in alternate years. This is true of medical expenses, currently deductible only to the extent they exceed 10% of a person’s adjusted gross income. As of early December, the House bill would repeal this deduction, though the Senate version would retain it. This creates an opportunity to utilize the medical-expense deduction, possibly by prepaying certain items in 2017, if you are near this year’s threshold.

Making a move

Deductions for tax return preparation fees and personal property taxes also are on the chopping block. And if you plan to move your residence and deduct moving expenses, it might be wise to move before January. That deduction is scheduled for repeal under both bills (except for active-duty military members under orders to move).

Both the House and Senate bills contained provisions to scrap the personal exemption deduction, though there’s not much taxpayers can do to plan around the loss of that tax break. As an offset (at least partially), both the House and Senate bills would roughly double the standard deduction — a move that would make itemizing less attractive for millions of Americans.

Reform and the tax gap

The Government Accountability Office estimates Americans pay 81.7% of taxes owed on a voluntary and timely basis. According to the report, which relies on Internal Revenue Service estimates, taxpayers collectively owed $2.5 trillion in taxes annually, of which $2.04 trillion was paid in a timely and voluntary manner. Another $52 billion was collected in late payments and enforcement actions, with the IRS estimating $406 billion never will be paid.