Don't miss out: 9 things to consider before the clock strikes midnight on 12/31/17
Support an elderly relative: The Tax Cuts & Jobs Act (TCJA) is eliminating personal exemptions after 2017. If you have an elderly relative who has little or no income other than Social Security – a parent, a favorite aunt or uncle – make sure you meet the half-support test to qualify for a dependency exemption this year. For instance, if giving them and extra $1000 around the holidays will ensure you can claim them as an exemption, be generous. Each exemption in 2017 is $4050.
Charitable giving: Although the charitable donations deduction is not going away with the new tax legislation, as an itemized deduction, fewer people will be able to take advantage of the deduction due the increased standard deduction. So if you can, give even more before 12/31/17.
Check your Flexible Spending Account balance: This is a great fringe benefit but there is a catch called the “use it or lose it” rule. Check your balance and use it and also check if your employer has adopted the grace period permitted by the IRS to allow employees to spend 2017 money as late as March 15, 2018. If not, make a trip to the drugstore, dentist, optometrist, etc. to use of the funds in your account.
Use the “loss harvesting” strategy: sell investments such as stocks and mutual funds to realize losses that can offset any taxable gains you have had during the year. These losses cancel out gains dollar for dollar. If the losses are greater than your gains you can use up to $3000 of the excess loss to reduce ordinary income. And if you have more than $3000 in excess loss, it can be carried over to the next year and beyond until it is used. On the other hand, you could realize a short-term gain now that may be absorbed by a carryover loss from a prior year.
NOTE: the rules for capital gains and losses are essentially staying the same under the new law.
Get a head-start on spring semester: Parents may qualify for one of the two higher education credits (these phase out based on our modified adjusted gross income). If you qualify, consider paying for spring semester before 12/31. The credit may offset income that is taxed at a higher rate in 2017.
Make an extra mortgage payment: Making your January mortgage payment in 2017, you can increase your mortgage interest deduction for the 2017 tax year. Although the mortgage interest deduction will still exist in 2018, due to the new tax legislation you may be taking the increased standard deduction and not itemizing next year so you can maximize your 2017 deduction by making this extra payment.
Prepay property taxes: as we have covered in previous blog posts, the new tax legislation limits the deduction for state and local taxes to $10,000 annually. So your tax benefit for payments made in 2018 will either be reduced or nonexistent, depending on your ability to itemize. If you are able to prepay any of your 2018 property taxes before 12/31/17, you can add the payment to your 2017 deduction.
for those living in a Co-op building, if your management company has stated (as many have) that they will not pre-pay the property tax you will not be able to claim this in 2017.
the TCJA specifically bans taxpayers from prepaying state and local income taxes to increase deductions for 2017, but it does not prohibit prepayment of property taxes.
Rules about prepayment are different state to state, and sometimes even county to county. Call your local tax assessor's office before Friday.
Beware of Alternative Minimum Tax (AMT): If you are in AMT territory or you inadvertently trigger it, accelerating tax deductions can cost you money. AMT was originally passed to make sure that the wealthy were paying at least a minimum amount of tax but because of inflation this increasingly is impacting the middle class. AMT is calculated separately and with different rules from your regular tax liability. If AMT is triggered, you are responsible for paying the higher rate. Certain expenses that are deductible under regular tax rules are not under AMT. State and Local taxes is one of these… so if you anticipate being subject to AMT in 2017 and you pay quarterly installments to the IRS, do not pay your installments that are due in January 2018 in December 2017 because, in this case, they will not help reduce your taxable income.
TIP: If 2017 was similar to 2016 you can check your 2016 tax return to see if you paid AMT last year to help you make your decision now. Look at line 45 on page 2 of your1040 - if it is blank you did not pay AMT in 2016.
Check IRA distributions: You must start taking regular minimum distributions from your traditional IRA by April 1st following the year you turn 70 ½. If you don’t take out enough you will trigger a steep penalty:
50% excise tax on the amount you should have withdrawn based on your age, life expectancy, and the amount in the account at the beginning of the year.
After that, annual withdrawals must be made by December 31 to avoid the penalty.
When you make withdrawals, ask your IRA custodian to withhold tax from the payment so you don’t have to worry about making quarterly estimated tax payments on the distribution.
NOTE: The required minimum distributions apply to traditional IRA’s not Roth IRA’s.