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Individual Year-End Tax Planning

December 2017

Johnson Price Sprinkle PA (JPS) accounting firm realizes every year there are subtle changes to our personal lives or to the tax laws that make year-end tax planning a challenge. If on top of that, you add major tax reform changes being considered on Capitol Hill, the challenge is even greater. Despite these complications, year-end tax planning should be considered a top priority. Consider some of the following tips to lower your tax bill in 2017.

*Disclaimer: Any new tax reform legislation may affect your tax situation. Consult with your tax professional to discuss how provisions of any new law will affect your 2017 tax liability.

Life Events That Affect Year-End Planning
Year-end tax planning should consider the impact of any life changes that occurred in 2017 and any changes that may occur in 2018. A change in marital status due to marriage, divorce or death could affect your filing status, which influences the tax rate used to calculate tax on income, among other things. A change in the number of dependents, such as the birth of a child or a child graduating from school, can also have an impact on taxable income. These factors may impact whether it is better to accelerate income in 2017 or defer income until 2018. If you’re not sure of your correct filing status, you can check the IRS website here.

401(k), Traditional IRA, or HSA Contributions
Pre-tax contributions to a company retirement plan or a self-employed retirement account is an excellent way to reduce taxable income. The 401(k) contributions limit for 2017 is $18,000. Individuals age 50 or older by year-end can make an additional contribution of $6,000 (total $24,000 for 2017). Traditional IRA contributions can result in a reduction in income if an employer does not offer a retirement plan. This deduction may be available but can be limited if you or your spouse are covered by a retirement plan and your income exceeds certain levels based on your filing status. The Traditional IRA contribution limit for 2017 is $5,500, with an additional $1,000 if you’re age 50 or older by year-end. Another great feature is that you have until April 15, 2018, to make a Traditional IRA contribution to take advantage of the deduction in 2017. Individuals covered by a qualifying high deductible health plan can make deductible contributions to a Health Savings Account (HSA), with certain limits. For 2017, considering a full year of coverage, the maximum contribution is $3,400 for self-only coverage and $6,750 for family coverage, with an additional $1,000 for those 55 and older.

Adjustments to Income Tax Withholdings or Estimated Tax Payments
You should determine if your taxes are over or underpaid before year-end. If you face a penalty for underpayment of federal or state income taxes, increase your withholdings or your estimated tax payments to avoid these penalties for 2017 and in the future. Special consideration should be given if a person has multiple jobs or both spouses work. Special consideration should also be given if AMT (Alternative Minimum Tax) applies to your tax situation. For example, the benefit from accelerating state income tax payments in 2017 may be reduced for taxpayers subject to AMT.

Accelerate Itemized Deduction
Potential legislation could increase the standard deduction from its current rate of $6,350 for single filers and $12,700 for joint filers to $12,200 for single filers and $24,400 for joint filers. The result of this could be that some taxpayers will no longer benefit from itemized deductions like property taxes, medical expenses, and charitable contributions. Taxpayers who find themselves in this situation may want to consider accelerating these deductions in 2017 instead of paying them in 2018. For example, you may not want to wait until January 2018 to pay your 2017 property tax bills. Instead, pay it now and get the deduction in 2017 when you plan to itemize.

Realize Capital Losses
If you have experienced any unrealized losses on investments this year, it’s possible to utilize some of those losses to offset gains. One way to accomplish this is to sell the original holding and then buy back the same investment at least 31 days later. Be mindful that any investment you sell has been held longer than 30 days and you wait at least 30 days to repurchase. This is to avoid any “wash sales” that could prevent the loss from being deductible.

The typical strategy for year-end tax planning is to accelerate deductions and defer income. However, there are situations where this conventional wisdom is not the best strategy. Remember to consider your unique situation when formulating your year-end tax planning and consult a professional regarding any uncertainties and ensuring you don’t pay any more tax than you’re obligated to pay.

You do not have to go it alone. Contact JPS.

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