While the GOP works on passing a finalized tax reform bill, uncertainties about the future of legislation have raised concerns among taxpayers who are trying to plan ahead for 2018.
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As Republicans iron out the final details and work on getting a bill to President Donald Trump’s desk before the New Year, here are some steps taxpayers can take now to save money and prepare for the future.
Accelerate deductions
If you think your taxes may decrease in 2018 under the new legislation, you might want to consider accelerating deductions in order to reduce your tax burden for the current year.
Hans Scheil, president of North Carolina-based Cardinal Advisors, said some ways individuals can accomplish this is by paying January’s mortgage payment in December or making the majority of your 2018 donations in December.
Accelerating deductions is not just a good idea because tax rates could decrease, Scheil pointed out, but under the proposals being considered in Congress, some deductions are at risk of being limited or eliminated altogether. Additionally, the standard deduction will be increased to $12,000 for individuals and $24,000 for married couples, so less people will be itemizing.
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Charitable giving
Accelerating the charitable giving deduction is a big way taxpayers can stand to benefit if they are currently itemizing, but won’t be under the new tax framework.
“Making extra charitable contributions before year’s end could be wise because you won’t be able to write them up next year if you’re not itemizing,” Elijah Kovar, co-founder of Great Waters Financial, told FOX Business.
While many tax experts advise making next year’s charitable contributions in 2017 so they can be written off, Kovar said taxpayers have the option of stashing as many years’ worth of charitable donations as they can afford to in a donor advised fund. Those funds can then be given away at the investors’ leisure, but taxpayers will reap the upfront benefits of the charitable deduction this year.
The deadline for stock transfers into this type of nonprofit fund is Dec. 29th, for cash is Dec. 30th.
SALT and property tax strategies
GOP lawmakers are scheduled to limit the amount of state and local taxes that individuals can write off, a controversial change to the popular deduction known as SALT.
Kovar recommends taxpayers make the most out of the law as it stands now by prepaying on property taxes.
Additionally, if you owe state income taxes, get them in and get an estimated state payment now, because you can deduct it. Kovar noted that even if you slightly overpay, you will get that money back in April.
Delay income
“If you’re able to delay some income and, like if your employer has a bonus that they’re going to pay you, if you could see that bonus in 2018 you could potentially pay lower tax rates on it,” Scheil said.
Especially for people who own their own businesses, it might be worthwhile to shift income in 2018.
Additionally, Kovar added most companies will let employees defer up to 100% of their last paycheck into their 401(k). He said a strategy that could be useful for those expecting lower taxes next year is to make a larger contribution now and take home a larger portion of income in January, when the tax brackets could shift, by turning off contributions.
Roth conversions
Both the House and Senate versions of the tax bill propose eliminating the ability of individuals to undo a Roth IRA recharacterization. This means if you converted funds into a Roth IRA, you would not be allowed to reverse it or recharacterize it.
Scheil noted that individuals likely won’t be prompted to take any action this year ahead of the potential rule change, since the stock market performed well this year rendering those gains tax-free. However, beginning next year, individuals may “want to consider or reconsider actually doing a Roth reconversion simply because tax rates are going to be lower.”
