Year-end tax planning is generally oriented towards the time-honored approach of deferring income and accelerating deductions to minimize 2017 taxes. But tax planning this year must also take into account comprehensive tax reform under the Trump administration.
Many familiar late-year tax moves remain sensible before reform kicks in, according to the IRS. Checks or credit card payments to a charity, for example, count for 2017 as long as they are mailed by the last day of the year. Your clients older than age 70½ are generally required to take RMDs from retirement accounts by the end of 2017. Some Individual Taxpayer Identification Numbers will also expire on Dec. 31 and must be renewed.
“Donations of appreciated stock is something I always like to remind clients of, especially this year with the increases we’ve seen in the stock market,” said Sheila Eichelberger, a CPA and tax principal at SB & Company in Hunt Valley, Md. “Generally, the deduction is obtained for the full value of the property, such as stock price on date of contribution, while income tax on the appreciation in value is avoided.”
Reform, of course, moves the mundane to the back burner this year. For example, key – and contested -- provisions in both the House and Senate bills limit the deduction for state and local income taxes and the deduction for property taxes to a combined $10,000. “Consider prepaying property taxes and charitable obligations, particularly those which are currently limited to 80 percent deductibility related to ticket-purchasing privileges for collegiate athletics,” said Elizabeth Leatherman, CPA and associate director of tax services with Dean Dorton Allen Ford in Lexington, Ky., and member of the Kentucky Society of CPAs.
“To the extent that we can expect lower overall tax rates in future years, it also stands that these deductions are worth more to taxpayers currently, before rates are potentially reduced,” Leatherman said.
High-net-worth clients accustomed to reviewing their alternative minimum tax liability versus regular tax liability may find that they’ve had significant fluctuations in income from year to year “and could explore the benefit from being able to shift AMT-triggering items from an AMT year to a non-AMT year,” Eichelberger said. “For many taxpayers, large amounts of certain items may trigger AMT liability: itemized deductions for state income, real estate taxes and the addition of certain income from incentive stock options, for example.”
Residents of states with higher income tax rates, such as New York and California, are more likely to be affected by the AMT, she added.
“When planning for taxpayers who border the … AMT tax brackets, it may make sense to defer or accelerate items of taxable income or deductions that are not caught up in the AMT,” Eichelberger said. “For example, significant long-term capital gains in any tax year could push a taxpayer into the AMT.”
Three other good tax moves for your client before the end of the year: “Pay your CPA fees, pay your financial advisor fees, pay your January 2018 mortgage payments -- because these deductions are likely to be disallowed during 2018,” said Jim Erickson, a CPA in Bellevue, Wash. Erickson also recommended paying CPA and similar professional-services fees through a business.
Even if reform seems settled, planning strategies are just starting. “Once an agreement is reached as to what will become the tax law, much work will then need to go into ironing out details,” Leatherman said. “It’s important [your HNW clients] work with a qualified team of advisors to consider all ramifications of any potential restructuring.”