2017 Year-End Tax Planning Checklist
As House Republicans’ tax reform plan moves through the House and Senate, there will be many fits and starts along the way and it’s likely that a number of plan provisions will change. To keep up with the latest developments, take a minute now to read A View from Washington series with exclusive insights from our Washington policy expert Doug Fisher. And remember, even with the uncertainty about what lies ahead, there are still actions to consider for the 2017 tax year. Here are ten tax-saving considerations for you to review with your financial and tax advisors prior to this year’s December 29 deadline.
1. Rebalancing your portfolio/harvest losses.
If the record-setting gains in the stock market this year have thrown the equity portion of your investment portfolio out of alignment, now is a good time to review your overall asset allocation with your advisor to decide which asset classes might need trimming and which should be beefed up. If getting back to your target allocation involves selling stocks that have significant gains, you may be able to offset those gains and reduce your 2017 income tax bill through tax-loss harvesting —selling investments that have lost value over time and using those capital losses to offset any capital gains (or, in the absence of gains, up to $3,000 a year in income).
2. Making annual gifts.
This year you can again gift up to $14,000 per person, to any recipient without incurring gift taxes. For example, if both you and your spouse take advantage of this annual gift tax exclusion, you can give a total of $28,000 to each of your children and grandchildren, without paying gift taxes, while also reducing the size of your taxable estate. And, as long as the gift doesn’t exceed the $14,000 limit, it will not count against your lifetime estate tax exclusion. (This annual exclusion rises to $15,000 in 2018.)
In addition to the annual gift exclusion, you can also make unlimited gifts to pay for tuition and medical expenses without incurring gift taxes. Payments made directly to the educational institution or medical provider also do not count against the annual gift exclusion. Please consult your tax preparer as special rules apply.
3. Accelerating your charitable/philanthropic giving.
Charitable giving has always been an excellent way to support causes that are important to you, while also reducing your income taxes. But this year you may want to take a closer look at your giving strategy with eight years into a bull market and with stocks at record highs. If you must sell some highly appreciated securities in your portfolio to correct an imbalance, now might be a good time to donate those securities instead (rather than making a cash donation), because you won’t pay taxes on the gains if they go to a qualified charity.
4. Contributing to a Donor Advised Fund.
Creating and contributing to a Donor Advised Fund (DAF) for 2017 may be another good move if you decide to accelerate your charitable giving. Because a DAF allows you to make a single large contribution each year that can be paid out later, over time, to the charities of your choice, you don’t have to make the decisions about which charities to support right away.
If you donate appreciated securities to a DAF, you can get an income tax deduction based on the fair market value of those securities while avoiding the capital gains tax impact of selling them outright. For more on these and other charitable giving strategies for the current tax year, see Three factors that impact the value of your year-end gifts.
5. Taking your required minimum distribution (RMD).
If you are age 70 ½ or older, you must take your required minimum distribution (RMD), based on the value of all of your traditional IRAs and 401(k)s, by December 29. If you miss the deadline, the penalty is 50% of the amount that should have been withdrawn. The exception is if you turned 70½ this year. In that case, you can delay taking your RMD until April 1, 2018.
If you don’t need the money and want to avoid paying income taxes on it, you can make a Qualified Charitable Distribution of up to $100,000 directly from your IRA to a qualified charity instead. While the distribution counts toward your RMD and is income tax-free, it is not eligible for a charitable deduction.
6. Maximizing contributions to tax-advantaged retirement accounts.
Make sure you’re taking full advantage of any company-sponsored retirement plans available to you now. Beyond contributing enough to capture any company match, consider contributing the $18,000 maximum for 2017, plus the $6,000 catch up amount if you’re age 50 or older. In addition to maximizing your retirement account contributions, talk to your financial and tax advisors about the potential benefits of converting an existing IRA to a Roth IRA.
7. Reviewing employer-provided benefits including FSAs and HSAs.
With open enrollment for employer-provided health and welfare plans taking place this month, now is the time to use this “window of opportunity” to compare plans and coverage to make sure the ones you select still meet your needs, especially if your personal or family situation has changed.
During open enrollment you can change to a different medical or dental insurance plan to increase coverage or lower costs. You can also choose to enroll in a high deductible health plan and Health Savings Account (HSA) option if one is offered. Any money left in these plans at year end has the potential to grow tax-deferred, and won’t be taxed when it’s withdrawn in the future to pay for qualified medical expenses.
In contrast, a Flexible Savings Account (FSA) may require you to use the money you put into it by the end of the calendar year—or lose it. While new rules allow employers to let you carry over $500 or take an extra two and a half months to use the funds, your employer is not required to give you these options. Please check your plan to see what flexibility you have, and what expenses your FSA covers.
8. Prepaying expenses to increase your tax deductions.
Prepaying property taxes, mortgage payments, medical bills, or estimated state or local income taxes may give you additional itemized deductions that can reduce your 2017 taxable income. Plus, if some of these deductions are eliminated (or limited) next year, this may be your last chance to take advantage of those tax savings. Talk to your tax advisor about what expenses you should consider paying now instead of in 2018.
9. Distributing trust assets to beneficiaries.
Trusts reach the top tax brackets more quickly than individuals do. If you’re the trustee for a trust that gives you some discretion over when income is distributed to beneficiaries, consider making those distributions before year end, rather than having the trust taxed at the higher trust-level tax rate. Consult your financial advisor, trust officer, trust administrator, or tax preparer for guidance.
10. Managing changes if you're recently married.
AIf you got married this year, don’t forget to check in with your tax advisor. While some changes you need to make, like notifying the IRS and Social Security about your new name and address, are just “good housekeeping” practices, others can affect the amount of taxes you’ll pay. For example:
While you may have been able to deduct up to $3,000 of capital losses on your tax return when filing as individuals in the past, a married couple filing jointly (or married filing separately) is limited to a total $3,000 loss.
Conversely, filing jointly with a new, non-working spouse could mean an opportunity to reduce your withholding or estimated tax payments.
Remember, because your tax filing status is determined on the last day of the tax year, you and your new spouse will be treated as “married” for the entire year, and can no longer claim “individual” filing status, regardless of when you got married. Instead, your filing choices for this year’s return will be “married, filing jointly” (where incomes and deductions are combined) or “married, filing separately,” which can be more complicated in community property states. If you have one, the terms of your prenuptial agreement can also affect your filing choice.
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