December is always time for some last-minute tax planning. The basics are covered in this old blog post of mine.
However, this year it is different, thanks to the Trump tax reform. I wrote my quick first look at the tax reform, and I will write a lot more soon. Today, I want to stress some urgent moves that need to be done right away, before December 31st.
1. Pre-pay 2017 property taxes on your personal residence
Why? Starting in 2018, the tax reform doubles the standard deduction. As a result, you may not be able to itemize your deductions in 2018, wasting the potential deduction. And even if you can still itemize in 2018, the deduction for property taxes will be limited under the new law. Grab the deduction in 2017!
How? Go online to your county tax collector, as well as school district, city, MUD and whatever other local authorities collect taxes on your residence. Pay your next installment or the entire 2017 bill – whatever is due now. Even taxes that have deadlines in 2018! As long as you entered your payment by 12/31 – you’re considered to have paid the tax in 2017.
But… But if you’re sure you will not itemize in 2017 – then there is no point. For example, if you do not have a mortgage and do not make substantial charitable donations, then maybe you cannot itemize in 2017. If you’re not sure, however, then go ahead and pay.
Also… I’m talking about property taxes, not income taxes. This strategy will NOT work for state income taxes, so do not try to rush those.
And… The prepayment issue caused a lot of controversy after the last-minute IRS warning. See my follow-up post where I discuss this controversy. Hint: it is safe to prepay taxes that have been assessed.
1a. What about property taxes on your rentals?
Generally, it’s a good idea to prepay them, too. The Trump tax reform, however, did not change anything with investment properties’ taxes. The old reasons to prepay them still apply.
2. Pre-pay 2018 charitable donations
Why? Same reason as pre-paying property taxes: doubling of the standard deduction can prevent you from taking a charitable donation deduction in 2018.
How? This can be slightly more challenging, because many non-profit organizations, especially religious congregations, do not accept online donations. Your church will likely not process it until January and will report it as a 2018 donation. In order to prove to the IRS that your donation was made in 2017, you need to send your check with certified mail.
But… Same disclaimer as for property taxes: this strategy is only helpful if you do itemize in 2017.
3. Pre-pay any job search, job-related and investment-related expenses
Why? They are no longer deductible, starting from 2018. This is your last chance.
How? If you’re planning to sign up for a job search service, take some job-related classes or buy a computer for your W2 job – do it now. You can also pre-pay union and professional dues, investment-related services and subscriptions, and investment advice.
But… “Job” means your W2 job, and “investment” means your personal investments like stocks and mutual funds. Everything related to your business and real estate holdings is NOT restricted by the tax reform, so no need to panic here.
Also… We’re only talking about expenses that come out of your pocket, as opposed to those reimbursed by your employer. And they have to be substantial enough to matter: higher than 2% of your total income. After that, they become part of your 2017 itemized deductions, provided that you do itemize for 2017. If you do not itemize – ignore the whole thing.
3a. Pre-pay any other “2% miscellaneous” expenses
Job-related and investment-related expenses are not the only deductions on the long list of deductions killed by the tax reform. Most of the other deductions in this group, however, are insignificant and obscure. In case you wonder about them – you can check the the official IRS publication here.
4. Pre-pay for your job-related long-distance move
Why? The moving expenses deductions is dead after this year.
How? If you have to move in early 2018 due to a job change or a new business opportunity – try to prepay moving expenses. Having a contract with movers is not enough, it must be paid for – which brings some risks.
But… If your new employer is paying for the move or reimbursing you – nothing to worry about, tax-wise. He has new rules, but it’s not your problem.
Also… Check the official IRS rules, as there’s a lot of small print involved. The move must be at least 50 miles away, there’re strict timelines for starting a new job, and a lot more to know. Be especially careful if the move is related to your business, as opposed to a W2 job.
5. Speaking of your business – prepay business expenses!
Why? Kind of obvious, right? You can take a deduction sooner. The tax reform added a bonus to this strategy: since the tax rates on businesses are going down, you should get more value out of this deduction in 2017 than in 2018.
How? Also obvious, I hope. Let’s just refresh the concept of “paid” when it comes to taxes: credit card information entered or check mailed. You do not have to wait until they receive and cash your check or until you pay your credit card bill. If you rely on mailing, get a proof of timely mailing, to be safe.
But… Another nugget from Captain Obvious: do not buy stuff that you do not need. Shameless plug: what you do need, however, is our educational products, and they are on a huge 45% OFF anniversary sale!
Also… If your business started in 2017 and had no income – you may not want to increase deductions. Read my old blog post about this.
6. Business, part 2 – defer business income
Why? Next year, the tax rates on business income are significantly lower, thanks to the tax reform. So, you pay less tax, AND you pay it a year later!
How? Now, this is easier said than done. If you finished a job and expecting to get paid – ask your customer to wait paying you until January. Most clients won’t mind – unless they also read my blog and noticed the previous recommendation to accelerate business expenses. Just make sure you will get paid, OK?
But… Waiting to cash a check is NOT income deferral! The IRS rules of constructive receipt specifically prohibit this. Once the check is in your hands – it is income.
Also… This strategy assumes that your income stays roughly the same. If your overall income will be much higher next year than it is this year – deferring income may backfire.
7. Consider Roth conversion, but with a new caveat!
Why? Roth conversion strategy is not new. There are no new reasons to do a Roth conversion, but there are plenty of reasons why timing of Roth conversions is important. It’s outside the scope of this article.
How? You need to request the conversion with your custodian: the company that holds your money. The requests can be done online, in person, and sometimes over the phone. However, your custodian needs some time to process your request, so do NOT wait until Friday. Call today!
But… Here is where the Trump tax reform comes into play. Under current law, you can “undo” Roth conversion if you change your mind or your CPA recommends so – known as recharacterization. Not under the new law, however! Unfortunately, the new law is not clear on whether you can still undo 2017 Roth conversions. Beware! There is a chance that your last-minute 2017 conversion will be irreversible.
8. If your IRAs tanked and you want out – get completely out now!
Why? There is a very little known deduction for a loss of value in an IRA. But it requires closing ALL of your existing IRAs or Roth IRAs. This deduction will not be available in 2018.
How? Let’s say you had a self-directed IRA for private lending, and you borrower defaulted, and you won’t be able to collect or foreclose on his property. The value of your SDIRA dropped from $100k to practically $0. (Ouch, but I do know multiple people in this situation.) At least, you can still take a deduction for this loss – if you hurry up! You must close all your existing IRA accounts. You can open new ones in 2018.
But… Whatever is left in your IRA accounts, will likely become taxable and possibly subject to a 10% penalty when you close your accounts. If they’re almost empty – who cares. But if there’s substantial money left – closing the accounts may not be a wise move.
9. Finally, some things NOT to do this week
- Do not make major tax moves if in doubt, without asking an expert (not your Facebook friends).
- Do NOT believe what you read online about the tax reform. Tons of BS out there.
- Do not forego opportunities for the sake of saving taxes, ever!
- This includes not selling what you’d otherwise keep and not buying what you normally wouldn’t.
- Do not rush to create LLCs and corporations.
- Do not drink and drive on New Year’s Eve, please!
Happy 2018 to everyone!
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