Major tax changes in 2017 seem inevitable with the new face of Congress and the White House. Individual, business, and estate tax rules could undergo major changes for the first time in many years. While a proposed plan for reform exists, the extent, timing, and details will be subject to debate and discussion. Given this uncertainty, your focus needs to be on understanding the current tax landscape and the use of time-tested planning techniques to take full advantage of your situation. Here are ways to get your 2017 planning off to a good start.
Start early by focusing on individual tax saving opportunities.
Plan a year of giving
Regardless of other tax changes Congress makes, it’s likely that charitable donations as a tax deduction will be preserved. To benefit, keep all the records required so you can claim a full deduction for your charitable gifts. For instance, if you give a monetary gift of $250 or more, obtain a written acknowledgment from the charity at the time of the gift.
You may also want to consider making a donation of appreciated property in 2017. Typically, you can claim an itemized deduction of the fair market value of an asset when you donate property you’ve owned longer than a year. In addition, by donating the asset, you don’t have to pay tax on the gain.
One more way to benefit from charitable contributions: the IRA-to-charity rule that you can use when you’re age 70½ or older. This rule lets you make a donation to your favorite charity with money from your IRA while using the amount you donate as an offset of some or all of your required minimum distribution (RMD). Though you can’t take a deduction for the charitable contribution, not having to claim the income from the required distribution can garner other benefits.
Take full advantage of your home’s tax breaks
Your home offers a variety of tax breaks that are also likely to remain in effect in 2017 and beyond. These benefits, which currently include deductions for mortgage interest and real estate taxes, offer opportunities for tax savings as well as financial planning benefits. For example, you can generally deduct mortgage interest on loans you take out to buy your home. To get a current-year tax deduction while reducing the overall amount of interest you’ll have to pay, you might consider refinancing your acquisition debt into a shorter-term loan.
Consider other deductions as well
Also consider a preventive bit of planning for a tax break you hope you’ll never have to use: casualty losses. Generally, you can deduct losses for damage to personal property in excess of 10% of your adjusted gross income (after subtracting $100 per casualty). Take photos or videos now so you can show the condition of your property before and after any casualty.
Use tax-advantaged retirement plans
Retirement plan contributions are tax-saving winners, which is why establishing a regular contribution schedule early in the year is standard tax planning advice. The contribution limit for 401(k) plans for 2017 is $18,000. You can make an additional catch-up contribution of $6,000 when you’re age 50 and over, for a total yearly contribution of $24,000.
In addition to your 401(k), you can contribute to your own IRA. The maximum contribution for 2017 is $5,500, with an additional $1,000 catch-up contribution if you’re 50 or over. Your IRA also gives you the opportunity for late 2016 tax planning, because you can make a contribution for 2016 up until the April due date of your federal income tax return.
Make tax-smart investment decisions
Taxes can be a frustrating headwind against investment earnings. Part of the impact can be offset by being knowledgeable of the tax consequences of your investment decisions during the year. Here are some examples:
You can save taxes on your portfolio income by making what would normally be taxable sales within your tax-deferred retirement account.
In a taxable portfolio, consider investments that offer little or no dividend income, but instead generate non-taxable unrealized gains over time.
If you’re looking into a mutual fund, research the fund’s dividend or capital gain payment schedule to time your purchases around taxable distributions. This will reduce potential capital gains taxes at the end of the year.
When selling an appreciated security, pick shares you have owned for one year or more to qualify for the long-term capital gain tax rate. That’s generally 15%, while gain on stocks held less than a year can be taxed at rates as high as 39.6%. Selling a security that has lost value might also be a benefit. You can offset your capital gains with capital losses, and even offset up to $3,000 in ordinary income when capital losses exceed your gains.
Consider tax savings ideas with business activity
Make your meetings deductible. Incorporate planning to make spending money on growing your business a tax-wise event. For example, you might want to treat a client or customer to a meal. When you meet for a business breakfast or lunch, you can deduct 50% of the meal, giving you a tax benefit while improving your business relationships.
Skill development could mean tax breaks. Updating your professional skills is another opportunity to get a tax benefit. Schedule professional conferences during 2017 that will improve your current skills. With some limitations, travel to and from the conference, lodging, and related out-of-pocket expenses, as well as the actual conference cost, are tax deductible.
Consider your Section 179 options. The maximum Section 179 immediate expensing limit for qualifying property you bought and placed in service is $510,000 for 2017. The deduction is phased out above a $2,030,000 threshold for 2017. Section 179 expensing is also available for certain lighting, heating, and cooling equipment placed in service in commercial buildings. Remember, taking Section 179 does not change the amount that you can expense, it only changes the timing of expensing your qualified capital purchases. Good planning can help you determine the correct Section 179 strategy for your company.
Don’t forget to add in bonus depreciation. Bonus depreciation is an additional first-year deduction of up to 50% of the cost of qualified property that you purchase and place in service during the year. The 50% rate is effective for 2017. You can claim bonus depreciation in addition to Section 179 accelerated depreciation.
Consider a business entity review. Make time early in the year to review how your business is organized from a tax perspective. Your choice of entity plays an important role in the tax planning strategies you can use. Determine if your current entity type is the best for your business, or if a change might open up possibilities for tax savings.
Other 2017 planning considerations
While last year was quiet in terms of tax legislation, you’ll want to be aware of some changes that will have an impact on your 2016 personal and business tax returns and your 2017 planning. Here’s a brief summary.
IRA rollovers. In general, funds you withdraw from your IRA must be redeposited within 60 days of receipt. In some cases, if you inadvertently miss the 60-day deadline, you can get relief by providing a valid reason for the delay (“self-certifying”). If the IRS determines your reason valid, you have up to 30 days after the qualifying reason no longer prevents you from making the contribution to complete the rollover.
Home mortgage interest. You may be able to claim a larger mortgage interest deduction if you co-own a home with someone other than your spouse. In specific situations, both owners may be able to claim a deduction.
Home sale gain exclusion. Generally, you can exclude up to $250,000 of gain from the sale of a home when you’re single ($500,000 when you’re married), as long as you meet the requirements. You may also qualify for a partial exclusion, if the primary reason for the sale is unforeseen circumstances. “Unforeseen” means events you could not have reasonably anticipated before buying the home and moving in. For example, a partial exclusion was allowed when a family living in a two-bedroom, two-bath condominium gave birth to another child and needed a larger residence.
Partnerships. New partnership audit rules take effect in 2017. Changes include allowing the IRS to assess audit adjustments to the partnership. Certain partnerships, generally those with fewer than 100 partners, can opt out of the new rules.
Estates. Under basis consistency rules, you’ll need to calculate your basis in inherited property consistently with the amount reported on the federal estate tax return. Generally, you’ll receive a form from the estate. Be aware these rules affect your duties as an executor, as well as your reporting requirements as a beneficiary.
Expired tax benefits. While tax legislation made many temporary tax provisions permanent in 2016, some individual tax benefits expire in 2017. The Tuition and Fees deduction and the deductibility of mortgage insurance premiums are key among these tax benefits. If your 2016 tax return included these tax benefits, do not plan for them in 2017.
Prepare for the effect of retirement on your income tax return. Is this the year you’re going to retire? What changes will retirement entail? Will you be selling a business? A home? Will you move to a new state? As you contemplate these major decisions, take time for discussions about withdrawal strategies from IRAs and pensions, the allocation of assets within your retirement accounts, the taxation of social security benefits, and the impact of one spouse continuing to work.
Avoid unexpected tax bills on assets in your IRA. The general rule is that assets in your IRA grow tax-deferred, meaning you typically pay tax on the earnings when you withdraw the funds. However, some investments can generate income subject to a current tax that is paid by your IRA. The tax, known as the unrelated business income tax, can be triggered by income from a business or certain real estate investments. Analyzing and understanding the investments in your IRA can keep you from being surprised by this tax. This type of analysis can also prevent investments in “prohibited transactions” that can make your entire IRA taxable.
Call our Troy, Michigan IRS tax resolution experts at (248) 524-5240 or email us at info@franskoviakcpa.com to schedule an appointment for beginning-of-the-year tax planning.
We’re ready to help you minimize your 2017 tax bill.
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