Last minute tax moves for new bill

22 Replies

Quick take on new tax bill-if possible defer income to 2018. Pay deductions in 2017. My first move!

Lower tax brackets in 2018- less deductions available in 2018 compared to 2017. Example: Florida allows you to pay property taxes in November and December 2017 that are due March 2018. The deduction will be reduced if I wait until 2018 to pay property taxes. 

Fragments from my blog post. (Sorry, BP won't let me link to it, but you can google it)

Pre-pay 2017 property taxes on your personal residence.
This is not an absolute rule, but it should be a wise move for most people, not just investors. Because of the new law, you may lose the tax benefit of property taxes on your homestead. So make sure the bill is paid in 2017.

Defer business income into 2018.
If you’re about to get paid before the New Year, you may want to wait a few more days. Not only this income will be taxed one year later, but it might be taxed at a lower rate. Of course, your mileage may vary – it’s IRS taxes.

Accelerate business purchases into 2017.
You will get the business deduction in the current year, plus you might get bigger savings this year than in 2018.

If moving – pay for the move now.
Business-related long-distance moves will not be deductible after this year.

Make your 2018 charitable donations now.
They might get you less (or even zero) benefit in 2018.

Accelerate miscellaneous personal expenses.
The new law eliminates the so-called miscellaneous personal deductions. The last days of December is your last chance to score a tax benefit from them.

Great post

On top of already mentioned tips: 

  1. Don’t convert regular IRA to a Roth IRA, postpone your move until next year.
  2. If you have already, you can unwind before end. Starting next year, you won't be able to use a recharacterization to unwind a regular-IRA-to-Roth-IRA conversion.
  3. Pay the last installment of estimated state and local taxes for 2017 no later than Dec. 31, 2017, rather than on the 2018 due date
  4. If you won't be able to itemize deductions after this year but will be able to do so this year, consider accelerating “discretionary” medical expenses into this year. For example, before the end of the year, get new glasses or contacts, or see if you can squeeze in expensive dental work such as an implant.
  5. If you are considering a like-kind swap of other types of property (Not Real Property), do so before year-end.
  6. If you've been thinking of entertaining clients and business associates, do so before year-end. (the 50% of entertainment is not deductible going forward) 

@Dmitriy Fomichenko

@Ashish Acharya was talking about estimated property taxes, not estimated income taxes, I believe. The word estimated may be confusing in the context, but some state and local taxing authorities have not issued final bills yet.

And the benefit is to use the deduction this year, before the new limit and the new doubled standard deduction kick in.

@Dmitriy Fomichenko  

My take as a  non CPA,  is if your 1st and second home property taxes are over $10k you will lose the amount over $10k as a deduction next year. I see no reason to pay estimated federal income taxes early unless it has to do with SALT which I believe will not be deductible next year. I am not affected by SALT so I did not read yet. I also do “cash” basis accounting vs “accrual” but not sure if that makes a difference- smarter CPAs may be able to help. 

@Ashish Acharya

I probably don't agree with not converting to Roth or reversing the conversion already done. What if I expect a higher income next year, for example? I can also split the conversion between the two years, reducing the combined tax hit.

The way I interpret it is that recharacterization of 2017 Roth conversions is still allowed. Otherwise it would be essentially a retroactive application. But I'm not sure, and the future Regulations should clarify it eventually.

Originally posted by @Michael Plaks :

@Dmitriy Fomichenko

@Ashish Acharya was talking about estimated property taxes, not estimated income taxes, I believe. The word estimated may be confusing in the context, but some state and local taxing authorities have not issued final bills yet.

And the benefit is to use the deduction this year, before the new limit and the new doubled standard deduction kick in.

 Individuals will only be able to claim an itemized deduction of up to $10,000 ($5,000 for a married taxpayer filing a separate return) for the total of (1) state and local property taxes; and (2) state and local income taxes. 

To avoid this limitation, I was talking about the last installment of estimated state and local taxes for 2017 no later than Dec. 31, 2017, rather than on the 2018 due date. 2017 taxes can be paid in 2018, but we dont wanna do that. 

But don't prepay in 2017 a state income tax bill that will be imposed next year – Congress says such a prepayment won't be deductible in 2017. 

Like  @Michael Plaks said, congress only forbade prepayments for state income taxes, not property taxes, so a prepayment on or before Dec. 31, 2017, of a 2018 property tax installment is ok. 

@Ashish Acharya @Michael Plaks

Thanks for your input I would like to know if 2017 recharscterization will be allowed up to 10/15?  I can read it both ways. It is for sure a January 2018 conversion is done and can’t be recharscterized. If I had a Roth conversion in 2017, that lost money, I would most likely recharacterize before year end to be on the safe side. 

Originally posted by @Carl Fischer :

@Ashish Acharya @Michael Plaks

Thanks for your input I would like to know if 2017 recharscterization will be allowed up to 10/15?  I can read it both ways. It is for sure a January 2018 conversion is done and can’t be recharscterized. If I had a Roth conversion in 2017, that lost money, I would most likely recharacterize before year end to be on the safe side. 

I don't think the answer exists as of now. The language of the bill is not clear on this, at least not to me. Could be interpreted both ways. My interpretation is based on the general intention of this reform to avoid retroactive application. In multiple instances, they specifically protected transactions consummated before the bill was finalized. 

People who converted to Roth in 2017 did so in expectation that they could recharacterize, up to extended deadline of 10/15/18. If recharacterization of 2017 conversions is prohibited - it would seem to be an instance of retroactive application. That's why I hope that the new law applies to conversions after 2017, not recharacterizations after 2017. But I can't be sure. I'm pretty sure that ultimately we will have Regs clarifying it.

As of today, I agree with you: it is safer to recharacterize conversion that already lost money, before the year ends.

Yep, not only are those taxes for the 2017 year, you get a small discount for paying early.....would be silly not to.

Originally posted by @Michael Plaks :

@Ashish Acharya

I probably don't agree with not converting to Roth or reversing the conversion already done. What if I expect a higher income next year, for example? I can also split the conversion between the two years, reducing the combined tax hit.

The way I interpret it is that recharacterization of 2017 Roth conversions is still allowed. Otherwise it would be essentially a retroactive application. But I'm not sure, and the future Regulations should clarify it eventually.

I agree with Michael, 

I dont think it has retroactive application.  If you recharacterize any after December 31 2017, that canned be unwinded. 

So, recharacterization cannot be used to unwind a Roth conversion that happened after 12/31/2017. However, recharacterization is still permitted with respect to other contributions. For example, an individual may make a contribution for a year to a Roth IRA and, before the due date for the individual's income tax return for that year, recharacterize it as a contribution to a traditional IRA. In addition, an individual may still make a contribution to a traditional IRA and convert the traditional IRA to a Roth IRA, but the provision precludes the individual from later unwinding the conversion through a recharacterization.

Originally posted by @Ashish Acharya :
Originally posted by @Michael Plaks :

@Dmitriy Fomichenko - 

@Ashish Acharya was talking about estimated property taxes, not estimated income taxes, I believe. The word estimated may be confusing in the context, but some state and local taxing authorities have not issued final bills yet.

And the benefit is to use the deduction this year, before the new limit and the new doubled standard deduction kick in.

 Individuals will only be able to claim an itemized deduction of up to $10,000 ($5,000 for a married taxpayer filing a separate return) for the total of (1) state and local property taxes; and (2) state and local income taxes. 

To avoid this limitation, I was talking about the last installment of estimated state and local taxes for 2017 no later than Dec. 31, 2017, rather than on the 2018 due date. 2017 taxes can be paid in 2018, but we dont wanna do that. 

But don't prepay in 2017 a state income tax bill that will be imposed next year – Congress says such a prepayment won't be deductible in 2017. 

Like  @Michael Plaks said, congress only forbade prepayments for state income taxes, not property taxes, so a prepayment on or before Dec. 31, 2017, of a 2018 property tax installment is ok. 

Ashish, are you referring to property taxes? My property taxes on my personal residence are paid through escrow, but the 2nd installment of 2017 is still to be paid in 2018. My lender will be paying $4,560. Are you saying I should pay that before 12/31 so that I can get a deduction for it in 2017 since I will not be able to deduct those in 2018 (my state and local taxes are significantly higher than $10K)? 

Originally posted by @Dmitriy Fomichenko :

Ashish, are you referring to property taxes? My property taxes on my personal residence are paid through escrow, but the 2nd installment of 2017 is still to be paid in 2018. My lender will be paying $4,560. Are you saying I should pay that before 12/31 so that I can get a deduction for it in 2017 since I will not be able to deduct those in 2018 (my state and local taxes are significantly higher than $10K)? 

 Yes, but you will have to cancel escrow - or they will double-pay

Thanks! I'll deal with escrow later, I will instruct them not to pay the 2nd installment by showing them proof of payment. 

Is this prepayment of property taxes pretty much a blanket recommendation regardless of circumstance? I have quite a bit in property taxes to pay on my different properties so prepaying is no small feat but if it’s worth it I would consider it. I read on Michael’s blog an example where an engineering couple didn’t benefit from prepaying because of exceeding the Passive Activity Loss Rules but didn’t really get what that had to do with deductions.

Thanks @Michael Plaks ! I paid the 2nd installment of my 2017 property taxes, and confirmed with the lender's escrow department that they will not send the double payment and will refund me the balance at the next escrow analysis. 

Originally posted by @Heidi Wilson :

Is this prepayment of property taxes pretty much a blanket recommendation regardless of circumstance? I have quite a bit in property taxes to pay on my different properties so prepaying is no small feat but if it’s worth it I would consider it. I read on Michael’s blog an example where an engineering couple didn’t benefit from prepaying because of exceeding the Passive Activity Loss Rules but didn’t really get what that had to do with deductions.

Sorry for the late response, Heidi. Prepayment of the personal residence taxes is pretty much standard recommendation, as long as the taxes have been assessed.

My blog's example was about prepaying taxes on the rentals. High-income landlords who do not qualify as "real estate professionals" (any full-time W2 employee would not qualify, for example) cannot claim losses from rentals. Let's say that after current expenses and depreciation, you already have a loss. If you prepay taxes, all you accomplish is increase this loss - which is already locked up. In this scenario, there is no benefit to prepay.

Originally posted by :Thanks for your input I would like to know if 2017 recharscterization will be allowed up to 10/15?  I can read it both ways. It is for sure a January 2018 conversion is done and can’t be recharscterized. If I had a Roth conversion in 2017, that lost money, I would most likely recharacterize before year end to be on the safe side. 

@Carl Fischer

IRS has clarified the effective date of a provision in the Tax Cuts and Jobs Act (TCJA) prohibiting a taxpayer from recharacterization a Roth conversion. The FAQs provide that if a traditional IRA was converted to a Roth IRA in 2017, it may be recharacterized as a contribution to a traditional IRA until Oct. 15, 2018.

Hope this helps.

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