Year-end tax planning can provide most taxpayers with a good way to lower a tax bill that will be waiting for them when they file their 2017 tax return in 2018. Since tax liability is primarily linked to each calendar tax year, once December 31, 2017 passes, your 2017 tax liability, for the most part, will most likely be set in stone.
Year-end 2017 presents a unique set of challenges for many taxpayers because of current efforts by Congress and the Trump Administration to enact tax reform legislation, the scope of which has not been seen since 1986. Whether this ambitious plan will be successful by the end of this year remains uncertain, but the reasons to prepare to maximize any benefits if it does happen are indisputable. Talk of lower tax rates and fewer deductions requires careful monitoring at this time, with “contingency” plans ready to go before year-end should these changes occur. Tax reform, although important, is not the only reason to engage in year-end tax planning. Other changes in the tax law, made by the IRS and the courts, have already taken place in 2017. Opportunities and pitfalls with these recent changes, as they impact each taxpayer’s unique situation, should not be overlooked as we approach year-end 2017.
Data gathering. Year-end planning, with or without the prospect of tax reform, should start with data collection and a review of prior-year returns. This includes losses or other carryovers, estimated tax installments, and items that were unusual. Conversations about next year should include discussions of any plans for significant purchases or dispositions, as well as any possible life-cycle events.
Bunching strategies. Certain items are deductible only to the extent they exceed an adjusted gross income (AGI) floor; for example, aggregated miscellaneous itemized deductions are deductible only to the extent they exceed two percent of the taxpayer’s AGI. Thus, for year-end and new-year tax planning, you might consider ways to bunch AGI-sensitive expenditures in a single year, so that particular deductions exceed their applicable floors and the taxpayer’s total itemized deductions exceed the standard deduction.
Life-cycle changes. External influences, such as changes in the tax law, however, may be only part of the reason for taking some action before year’s end. Changes in your personal and financial circumstances, such as a marriage, divorce, a newborn, a change in employment, a new business venture, investment successes and downturns, may require a change in course tax-wise since last year. As with any life-cycle change, your tax return for this year may look entirely different from what it looked like for 2016. Accounting for that difference now, before year-end 2017 closes, should be an integral part of your year-end planning.
Timing rules. Effective year-end tax planning, by its nature, requires the correct execution of specific timing rules under the tax code. Due especially to the current uncertainties surrounding tax reform, taxpayers must be particularly nimble and prepared to implement timing strategies well into December.
- For businesses, the IRS and the courts generally require use of the accrual method whenever inventories are used. For an accrual-basis taxpayer, the right to receive income rather than actual receipt determines the year of inclusion in income.
- Under the cash receipts and disbursements method (cash method), all items constituting income, whether in the form of cash, property, or services, must generally be included in income for the tax year in which the items are actually or constructively received; and deductions are generally taken into account for the tax year in which actually paid.
The cash method, which is required to be used by nearly all individual taxpayers, generally allows a cash-basis taxpayer to exercise some control over the year of income or deduction by accelerating or deferring receipts and payments. Thus, timing and the skilled use of timing rules to accelerate and defer certain income or deductions are the linchpins of year-end tax planning. For example, timing year-end bonuses, year-end tax payments, or sales of investment properties to maximize capital gains benefits should be considered. So, too, sometimes fairly sophisticated “like-kind exchange,” “installment sale” or “placed in service” rules for business or investment properties come into play.
In other situations, however, implementation of more basic concepts are just as useful. For example, tax-payers can write a check or charge an item by credit card in one year and have it count as a deduction in that year, even though the check is not drawn on the bank until the following year, or a credit card statement is not sent and paid until the following year.
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