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  • Writer's pictureSteve Coker, CFP

Year-End Tax Planning While the Rules Are Changing

As we move into the last months of 2017, aka tax planning season, we are faced with an unusual situation. Congress is debating the details of what could be one of the biggest changes to the US Tax Code in 30 years forcing many of us to make decisions this year despite the foggy future of the tax law. During this time of uncertainty, it is wise to stay informed about the current proposals being discussed. At the very least, this allows us to make decisions using the most current expectations of what could become law in 2018. With that in mind, here is a quick overview of what is expected and some thoughts on common tax decisions.

When we've written about President Trump’s stated objectives for tax reform in the past, we've noted the following goals: 1) a competitive corporate tax scheme 2) repatriation of overseas earnings 3) simplification of the tax code and 4) a middle-class tax cut. It is objectives 3 and 4 that will impact most Americans, as Congress outlines a plan to both simplify and reduce taxes. Generally, this means that the tax rate will be lower, but many of the deductions that currently exist will disappear in favor of a larger standard deduction.

The current proposal is for three tax brackets: 12%, 25%, and 35%; all lower than the existing tax brackets. However, almost all itemized deductions, except contributions to charity and the home mortgage interest deduction, would be eliminated. Instead, taxpayers would receive a higher standard deduction, almost doubling to $24,000 for married individuals.

At this point, you may be wondering what all these rule changes mean for you. The answer, of course, is "it depends." For most Americans, the give and take equation should result in a lower overall tax bill, but it is certainly not a guarantee. Many Americans will no longer need to itemize their deductions, achieving the simplification goal. However, those who typically have very high itemized deductions, for example from high state taxes, property taxes, medical expenses or any number of the dozens of deductions being eliminated, could see their taxes actually go up. We would expect this to be rare, but it is certainly more likely in high tax states like California.

Beyond the core income tax rates and deductions, there are more changes in the works. There are talks of consolidation of the various types of retirement plans (something we would applaud), and elimination of the deduction for contributions to pension plans (something we would oppose). Additionally, there are talks of changes to the inherited IRA rules that would require inherited IRA’s to be distributed within 5 years, dramatically increasing the tax on inheriting a large IRA.

With all this speculation and uncertainty, what decisions should you be making over the next 60 days while we are still in 2017? Here is a list of key decisions and some general recommendations:

• Defer income – YES. Overall, taxes should be lower in 2018 so pushing income into 2018 if possible is probably a great idea. For example, if you are planning to take a large IRA distribution soon, pushing that distribution back to 2018 could make a big difference.

• Accelerate deductions – YES. Generally, if you are planning business spending, charitable contributions, or other spending that currently qualifies as an itemized deduction, consider advancing that spending to 2017.

• Sell investment positions that are at a loss (tax-loss harvesting)? – YES. It is still not known what capital gains rates will be in 2018, but losses will likely have greater value in 2017. Consider using losses now.

• Defer investment gains by holding gain positions? – YES. This is almost always a good idea, but it is more important given that tax rates will likely be lower in the future.

• Make charitable contributions in December? – PROBABLY. While the charitable deduction will likely stay, for most taxpayers, it will likely be better to advance deductions while brackets are higher and other deductions remain.

Of course, everyone’s situation is different and so it is important to consider the big picture as you make these tax planning decisions. If you find yourself anxious about your taxes, know that we're here to help. If you would like to discuss decisions that you are facing, please don’t hesitate to reach out.

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