Making tax moves this year
Consider grabbing some deductions before Republicans take them away
Year-end tax planning will take on extra significance — and complexity — this year, given the likelihood that congressional Republicans will try to get a tax bill passed before Dec. 31 to claim a legislative victory for 2017.
The normal year-end tax advice goes like this: Figure out if you will be in a higher or lower income tax bracket next year.
If your tax rate is likely to go up next year, try to accelerate any income you can into this year and defer deductions until next year, so that your taxable income is higher this year and lower next year than it would be otherwise. If your tax rate is likely to go down, do the opposite.
This makes sense if you are self-employed and have some control over your income and expenses, if your income varies substantially from year to year because of bonuses or commissions, if you plan to stop working or start working next year or move into a new tax bracket for other reasons.
For most people with a steady job and consistent deductions, it’s usually not worth the effort. This year, however, they might want to consider grabbing some deductions before they disappear.
For example, the House and Senate tax bills would eliminate the itemized deduction for state and local income or sales tax starting next year. The Senate bill also would kill the deduction for property taxes, while the House bill would cap it at $10,000 per year.
If you are taking these deductions and not subject to alternative minimum tax, consider making the second in-
stallment of your property taxes — due April 10 in California — before the end of the year to get the added deduction in 2017. Likewise, if you are making estimated California income tax payments, consider making your final 2017 payment, due Jan. 16, before year end. This assumes you have cash to make the extra payments. Selling stock to raise cash could negate the benefit if you have to pay capital gains tax.
If you expect to be subject to the alternative minimum tax in 2017, there’s no reason to prepay these taxes because they are not deductible. Both Republican tax bills would eliminate the alternative minimum tax starting next year. On the off chance that Congress kills it, but not the state and local tax deduction, you could use these deductions next year.
If you are not subject to alternative minimum tax but close to it, deducting an extra property tax payment in 2017 could throw you into it, and you could wind up paying higher tax than you would otherwise. That’s because people are required to calculate their taxes under the regular and alternative tax systems and pay whichever is higher. Taking an extra state income or property tax deduction in 2017 could bring your regular tax bill below your alternative tax bill, said Jeff Levine, director of financial planning with Blueprint Wealth Alliance.
Again assuming you are not subject to alternative minimum tax, what happens if you accelerate these tax payments and Congress ends up preserving the state and local tax deduction? This time next year, you will be “short” some deducThe tions. In that case you can make up for them by prepaying your state taxes due in early 2019 by the end of 2018.
If a tax bill goes through this year, for most people there will be “more of a push to defer income and take deductions” in 2017, said Christine Brown, Senior Wealth Strategist at UBS Financial Services in San Francisco. Unfortunately there is “no easy way” for most people to know if they will be in a higher or lower tax bracket next year.
The House and Senate GOP tax bills differ in some major respects, but both would eliminate many deductions while lowering tax rates for most people.
Both would roughly double the standard deduction to $24,000 for married couples and $12,000 for individuals. Many people who currently itemize deductions would take the standard deduction instead, losing the benefit of whatever itemized deductions (such as charitable contributions) remain. Both would eliminate the $4,050 personal exemption you can claim for each taxpayer and dependent claimed on the tax return. But they would increase the child tax credit by different amounts.
net result of these and other many other changes is that most individual taxpayers would be in a lower bracket next year, but some would move to a higher bracket because they would lose so many deductions their taxable income would goes up substantially. Virtually all of the proposed changes affecting individuals would take effect next year and not apply to this year’s taxes.
To figure out where you would end up, you’d have to predict which provisions are likely to pass and take them all into account. Looking at one or two in isolation could give you an inaccurate picture.
That said, prepaying your taxes is a low-risk proposition for most people not subject to alternative minimum tax.
People who converted a regular individual retirement account into a Roth IRA in 2017 and think they might want to undo it should also do so by Dec. 31, said Levine.
When you convert a regular deductible IRA into a Roth IRA, the amount converted is added to your income for that year and you owe ordinary income tax on it. After that, the Roth grows tax-free. However, if the value of your Roth IRA falls after the conversion, you will wish you had not done it because now you owe tax on some appreciation that has disappeared.
Under current law, you can undo or “recharacterize” the conversion as late as Oct. 15 of the following year. You essentially put the money back in your regular IRA and don’t owe tax. It’s kind of a heads-I-wintails-I-win loophole.
Both bills would eliminate the ability to recharacterize a Roth conversion in 2018. “If you did a conversion this year and you are thinking about recharacterizing it, absolutely I would do it by Dec. 31,” Levine said.
Taxpayers still have time to contemplate their year-end moves, but shouldn’t wait too long. If Congress passes a bill this year, “it will be Dec. 31 or close to it,” said Howard Gleckman, a senior fellow with the Urban-Brookings Tax Policy Center.