There are 2017 year-end tax strategies available now with or without tax reform. There are also things you can do in anticipation or tax reform, regardless of whether the House or Senate version gets passed. In this article, I'll review both.
Planning under current tax law
Here are three things to consider:
- Maximize retirement plan contributions – If you still working and contributing to a 401(k), 403(b) or another work-related retirement plan, try to maximize your 2017 contributions. Remember, you can contribute up to $18,500 to your company retirement plan. Are you over age 50? If so, you can add another $6,000 to that for a total contribution amount of $24,500. Even if you are not able to contribute the maximum, making additional contributions before year-end will lower your tax bill. Check with your plan administrator to find out how to make additional contributions.
- Contribute to a traditional IRA – You can contribute up to $5,500 to a traditional IRA. Those over age 50 can add an additional $1,000 as a catch-up contribution.If you participate in a company retirement plan, your contribution deductibility depends on your income. They may be fully or partially deductible. If you make over the maximum income limit, contributions are not deductible. See this IRS page to get those limits.
- Make a Qualified Charitable Distribution – Are you over age 70 1/2? Consider making a Qualified Charitable Distribution (QCD). A QCD allows you to contribute your required minimum distribution (RMD) directly to a charity. Doing this removes the RMD from your 2017 taxable income. QCDs are only available to taxpayers over age 70 1/2 and taking RMDs. The maximum QCD contribution each year is $100,000. For more details on how this works, Fidelity offers a good summary here.
Planning under proposed tax law
It seems likely the Tax Cuts and Jobs Act will be enacted in some form. Both the House and Senate approved their versions of the bill. The two versions have differences that must be reconciled before final passage occurs. There are provisions common to both bills that offer planning opportunities to consider prior to year-end.
Currently, if you convert a Roth IRA, you have until October 15 of the following year to recharacterize or undo that conversion. There are lots of reasons you might want to do that, including a significant drop in the stock market or a change in your tax rate. As I wrote in my recent article, A Major Change is Coming to Roth IRAs, the Roth recharacterization option did not survive either the House or Senate versions of the tax reform. If the bill passes, all indications are this provision will survive. That means if you converted a Roth IRA anytime in 2017, you cannot convert it in 2018. So, if you are concerned about a market drop, tax rate changes, or the inability pay the tax bill for your conversion, you must recharacterize or undo that conversion before 12/31/2017. That leaves precious little time to get this done.
- Accelerate certain deductions – Both versions of the tax reform bill either reduce or eliminate some itemized deductions. Deduction for state and local taxes and the medical expense deduction could either be substantially reduced or eliminated. In 2017, you can deduct medical expenses above 10% of adjusted gross income. State and local income taxes are fully deductible in 2017. If paying medical expenses now rather than in 2018 puts you above the 10% threshold, pay them this year.
- Charitable contributions – Both versions of the bills raise the standard deduction as follows: Singles – $12,200 (House), $12,000 (Senate). Married filing jointly – $24,400 (House), $24,000 (Senate). Are your itemized deductions below these limits? If so, you can't itemize in 2018. Instead, you would use the standard deduction. Since charitable contributions are an itemized deduction, you won't be able to deduct them in 2018. Making those contributions now assures you get the deduction.
No matter the outcome of the final bill, you can still take advantage of these tax planning opportunities before year-end. I would advise not waiting for the final outcome. There is no guarantee that anything gets done this year. However, doing some or all of these things will help you regardless of the final product. As always, check with your tax advisor prior to making any changes.
What do you think? Will Congress reconcile these bills before year-end? How will the bill affect you?
You may also want to read my article, What We Know About the New Tax Reform Bill.
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