Year-end tax planning can allow you to capture tax-saving opportunities before they vanish on January 1st. This year, the stakes are higher. Tax reform discussions are underway, presenting the very real possibility of sweeping tax changes in 2018. This includes the loss of many common deductions.
If you itemize your deductions, it’s important to know how your taxes could change, and if there are deductions you can quickly secure before they potentially disappear.
Below, SageVest Wealth Management offers three common deductions to consider before year-end, plus a note on possible tax-free capital gains. Planning ahead may be especially important if you pay estimated tax payments, face medical bills, and/or are charitably inclined, but everyone’s tax situation is different. We recommend you work with a tax professional to address your unique personal considerations.
State Income Tax Deductions
State income tax payments are on the chopping block, representing a large itemized deduction loss for many taxpayers, particularly those living in high income tax states, and those who are high earners. If you pay estimated tax payments, or if you often owe state income taxes when filing your return, you might benefit from advancing your state tax payment before December 31st. Doing so allows you to capture the payment as a 2017 tax deduction that might otherwise be forfeited in 2018.
Check with your tax advisor to determine if you might be exposed to the Alternative Minimum Tax (AMT), which impacts your ability to utilize state income tax deductions.
Medical Expense Deductions
The loss of medical expense deductions as slated could be financially catastrophic for many individuals and families who face high medical costs.
If you envision a large medical expense e.g., dental work, it could be advantageous to accelerate them before year-end.
Note, medical expense deductions are currently limited only to the amount that exceeds 10% of your Adjusted Gross Income (AGI). For example, if your AGI is $200,000 and you incur $25,000 of medical expenses, only $5,000 qualifies as a deduction. As such, make sure you’ll be able to claim a deduction before you rush to incur medical expenses.
The good news is that charitable deductions should remain available to taxpayers under tax reform plans at the time of writing. However, the bad news is that they could be limited only to gifts that exceed $15,000 per year. This is due to the proposed increase in the standard deduction, in the absence of many itemized deductions. A higher standard deduction means that there’s a higher threshold you’ll need to meet before itemized charitable deductions become worthwhile from a tax standpoint.
Here’s an example: If the married standard deduction increases to $24,000 and your only other remaining deduction is your property taxes of $8,000, you’ll need $16,000 of additional deductions before you break even with the standard deduction. Thus, only gifts in excess of $16,000 would offer additional tax benefits.
If you’re charitably inclined, but aren’t sure if you’ll be able to deduct contributions going forward, a charitable gift fund could offer a solution. Charitable gift funds allow you to advance gift objectives into the current year, giving you an immediate tax deduction for the full amount contributed, while allowing you to distribute that amount to organizations over a period of years.
If this concept is attractive to you, two important considerations include:
Your Charitable Tax Deduction Limit(s)
The tax code limits the amount of charitable deductions you can utilize every year as a percentage of your AGI. Cash gifts are limited to 50% of your AGI, and non-cash gifts are limited to 30%. These limits should be considered, relative to your contemplated funding amount and your potential to capitalize on tax savings.
Your Financial Security
You should always evaluate charitable and tax saving objectives in terms of your financial security. Financial planning can help quantify what you can afford to give, while ensuring security for you and loved ones.
Tax-Free Capital Gains
As a reminder, anyone in the 10% or 15% tax brackets should also explore the possibility of realizing capital gains tax-free. The current tax structure extends tax-free capital gains if your taxable income falls below these thresholds:
Single: Taxable income less than $37,950
Married: Taxable income less than $75,900
Head of Household: Taxable income less than $50,800
If you project your taxable income may fall below these amounts and you have embedded capital gains in your investments, you’d be wise to consider realizing some gains before year-end to take advantage of a tax-free opportunity.
SageVest Wealth Management proudly engages in proactive tax and other financial planning services with each of our clients. Please contact us to discuss how proposed tax reforms may impact your finances, and how we can help to ensure that you’re making smart financial decisions – not just at year-end but throughout the year.