How to Lower Your Tax Bill Before 2018 and the GOP Tax Plan
As it stands now the proposed GOP tax reforms will take effect in 2018. Looking ahead this means your year-end tax planning may be more crucial than ever. A small amount of effort could potentially save you thousands in unnecessary tax bills. How to Lower Your Tax Bill Tax reform edition.
How To Lower Your Tax Bill Before Year End – Tax Reform Edition.
Fear of High Taxes got you down? Let us guide your through some year end tax planning moves that can help get your high taxes rates in check.
Mortgage Deductions, State Income Taxes, Medical Deductions, Property Taxes, Adoption, Alimony, Philanthropy, Stock Options, Electric Cars. Thoroughly bored yet? Both the House and Senate Republicans have proposed bills to overhaul the tax code which means changes are coming to all of the above areas of your taxes.
What will these changes mean for you? Many filers in high tax states, like California, New Jersey and New York, could see their tax bills skyrocket. On the other end, the proposed increase to the “standard deduction” could help as many as 30 million filers not have to track their deductions. Some businesses may get a tax break and the super-rich will likely set a break in death with the repeal or shrinking of the estate-tax.
The House and Senate bills differ and have little to no democratic support. Your guess is as good as mine as to what the final bills will look like. But looking ahead there are some big year-end tax planning opportunities. These smart money moves are even more advantageous this year ahead of the proposed tax reforms.
Here are a few key areas to consider before year end, based on my analysis of the current proposals.
Home Owners, Buyers and Sellers
The bill from the House would slash the mortgage deduction in half to just $500,000 for all mortgages funded after November 2, 2017. Short term current home owners would get a break. If they don’t move or refinance they will be able to keep the old $1,000,000 mortgage deduction cap. But I live in LA and the land alone under my house is worth more than these mortgage limits.
By comparison, the Senate bill would let the limit remain at $1 million. Both bills would end interest deductions for home equity loans. The senate bill would allow deductions on second homes but the house bill would not.
If you are refinancing a large mortgage you may want to hold off until this is finalized. Getting a better interest rate that could result in minor savings may not be worth it if you will end up having to pay significantly more in taxes.
Selling a home?
You may or may not know that you can make $500,000 on the sale of a home, and not owe any capital gains taxes on the profit. This assumes you are married and you lived in the home two of the last five years. The new bills proposed by the House and Senate would change that and require sellers to have lived in the home for five of the last eight years. For many, this won’t be that big of a deal. It could, however, affect people’s ability to move for work or move up the housing scale as their incomes grow.
If you are in the process of selling, you may need to get creative or aggressive to close before year end. If the House bill passes and homeowners end up losing the $500,000 exemption, that means selling your home will end up costing you $75,000 in capital gains taxes. As you can see it’s worth spending a little time and effort if you find yourself in this scenario.
Entrepreneurs and Small Business Owners
Changes are coming to pass through income. This applies to firms such as Partnerships, LLC’s and S Corporations. Depending on the type of business you run, your benefits would differ. I run a fiduciary financial planning firm that provides a service, therefore, my business will not benefit from this. On the other hand, if I manufactured something, I would likely get a tax break provided I made at least a certain amount of money under the proposed tax reform.
Business owners who think they will benefit from this tax break may want to defer income to 2018. They should also plan to accelerate as many deductions into 2017 where we assume their tax rate will be higher.
State Taxes – Really Bad for California, New York, etc.
What do California and New York have in common? High property values and high-income taxes. Here in California, the highest earners will pay 13.3%. OUCH! Add in Federal and Social Security taxes and you are looking at a top tax rate approaching 60%.
The House bill would eliminate the state tax deduction and cap the property tax deduction at $10,000. To translate that into a house value – divide $10,000 by your property tax rate. For example, in parts of California (Los Angeles) the tax rate is 1.25%. Divide 10,000 by 0.0125 and you get $800,000. If your house is worth more you will receive a smaller tax deduction under the house plan.
The Senate bill is worse and would completely eliminate the property tax deduction. This would cost many homeowners in California, and other high real estate valued areas, thousands of dollars per year.
Given all of this, you may want to prepay your property taxes and state taxes before year end. This will capture the deduction during 2017 before they are eliminated next year.
If you are at risk of owing the alternative minimum tax (AMT) make sure to talk with our Fiduciary Financial Planner and CPA before making this move. Triggering the AMT and its higher tax bill may negate any benefit.
Philanthropy and Charitable Donations
The plan of the House and Senate is for the standard deduction to nearly double. The estimated standard deduction for 2018 would be $12,000 (single) and $24,000 (married filing jointly) compared to $6,350 (single) and $12,700 (married filing jointly) for 2017.
This would drop the number of people who itemize deductions to just 10% of filers, down from 30% now. If you are not expecting to itemize next year you may want to consider making charitable donations before year end in order to get the tax break this year.
Teslas, Leafs and Other Electric Cars
Get your Tesla, Leaf, Prius Plug-in, Chevy Bolt or similar plug-in vehicle before year end. The proposed House bill would repeal the current credit of up to $7,500. Regardless of whether or not the repeal happens, electric vehicle manufacturers are coming close to maxing out their allowable tax credits on new vehicles.
Medical Expense Deductions may be Dead.
Are you ready for Grandma or your parents to come live with you? Losing this deduction could be devastating for seniors on a fixed income. This will also be rough for families facing major medical expenses. This will put extra pressure on the Sandwich Generation caring for aging parents and younger children.
“Roughly 55 percent of the 8.8 million taxpayers claiming the medical expense deduction in 2015 were age 65 and older” AARP
The House bill would eliminate this deduction but the Senate’s would keep it. This deduction is especially important for those with major medical issues or the elderly. Currently, you can deduct medical expenses above 10% of your adjusted gross income (AGI) or 7.5% of AGI for people over 65. For those currently paying large bills for home health aides and nursing home care, this could have devastating consequences.
This may not apply to you now but when health issues arise, this deduction could be a life saver by helping you maintain your financial security.
If you have major dental work, or other expensive medical procedures on the horizon, you will want to get them done in 2017. This is especially important if you are near or into the realm of being able to deduction the expense.
I work with many people at companies like Apple and SpaceX who have tons of stock options. Large stock option sales often trigger the alternative minimum tax (AMT). Talk with your Certified Financial Planner and CPA to strategize how to minimize your potential tax bill.
It may be in your best interest to wait until January to sell. The AMT is set to be repealed in the GOP tax reform which could have significant savings for those lucky enough to have a large amount of stock options.
Alimony may be Getting More Expensive
If passed, the proposed House plan will no longer allow deductions to be made by the payer. It appears that a forced divorce settlement (Alimony), signed before the end of 2017, will continue to get the deduction. For those currently in divorce proceedings, it may make sense to rush things along.
Keep in mind that things aren’t final and more changes could be proposed. Either way, the changes could have a huge impact. For high earners who need to pay $250,000 of tax-free income to a non-working former spouse, the tax savings from signing in 2017 versus waiting until 2018 would be around $43,000.
Divorce is expensive enough as it is.
Year-end Tax Planning Helps You Keep More of Your Hard-earned Money
Year end is always a great time to make smart choices to minimize your tax bill. It’s not what you make but rather what you keep. Why pay any more in taxes than you need to?
With sweeping tax reform on the horizon, year-end tax planning is even more imperative this year. While the proposed GOP tax plan will save some people money, many people with good incomes in blue states will see big increases in their tax bills.
Live for Today, Plan For Tomorrow.
DAVID RAE, CFP®, AIF® is a Los Angeles Certified Financial Planner™ with DRM Wealth Management, a regular contributor to Advocate Magazine, Huffington Post, Investopedia not to mention numerous TV appearances for on CBS, ABC, NBC, KTLA, KCAL and even Fox and Friends. He helps smart people across the USA get on track for their financial goals. For more information visit his website at www.davidraefp.com
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