December 28, 2017
In addition to the usual things that can be done by year-end to reduce income tax obligations (e.g. making additional charitable contributions), last week’s Federal tax legislation provides a couple of additional opportunities that are worth considering.
Starting in 2018, individuals will be capped on the amount of state and local taxes that they can deduct on their personal returns. For most taxpayers, that cap will be $10,000; the cap will be $5,000 for married taxpayers filing separately. The cap applies to the total of non-business real property taxes, non-business personal property taxes and state/local income taxes. Many taxpayers pay far more than $10,000 for these taxes annually, so the cap means they will be losing a tax benefit. There is no such cap in place for 2017.
If you have been assessed property taxes that are due in 2018, prepaying those this year could prove beneficial. First, the lack of a cap in 2017 means that you could get a deduction that you’ll lose come 2018. Second, for some taxpayers, 2017’s tax rate could be higher than their 2018 tax rate – a deduction is typically more valuable when a higher tax rate is in effect.
Note that the property tax must be assessed; merely prepaying a 2018 property tax that has not yet been assessed by the tax authority will not qualify it as a 2017 deduction.
State and local income taxes
Just like with property taxes discussed above, paying 2017 state and local taxes this year instead of in January or April of next year could prove beneficial due to 2018’s cap on deductible state/local taxes. If you typically make a 4th quarter state/local estimated income tax payment in January, you might want to pay that this week instead. Similarly, even though you might not be obligated to pay any additional tax right now, if you anticipate owing additional 2017 state or local income tax come April 2018, it might be worth paying that projected amount in 2017.
As with property taxes, prepaying 2018 income taxes this year won’t do any good; those can only be deducted against 2018 income, even if paid in 2017.
A common strategy businesses consider each year-end is whether or not to acquire and place in service additional assets such as computers, fixtures and equipment. Businesses can often benefit from 100% expensing under Section 179 or 50% bonus depreciation if the assets are in use by year-end, even if it’s not until December 31.
For the most part, the provisions in the new tax law kick in January 1, 2018. However, a bonus depreciation provision became effective for assets put in service after September 27, 2017. Effective with that date, bonus depreciation was expanded from 50% to 100%, and used (not new) assets that formerly did not qualify now do qualify. This means that certain assets can be expensed 100% instead of depreciated over many years. While it could be difficult to acquire and put in service an asset at this late stage, it might still be possible with items such as computers, furniture and vehicles. The increased deduction potential afforded by this new law could make it worthwhile.
As you might expect, tax savings cannot be guaranteed, and there are various limitations and restrictions that might apply should you choose to take any steps based on the suggestions presented here.
You don’t have to go it alone. Contact JPS.