Currently, year-end tax planning is clouded by questions about federal legislation. President Trump and many of the Republicans in Congress favor changes that would affect the tax code, and the success they will have in their efforts is difficult to predict.
One undecided issue is the future of the Affordable Care Act (also known as Obamacare), which might be retained, replaced, or repealed. Although this act addresses health insurance, it also includes several provisions relating to taxes. For instance, it includes a 3.8 percent surtax on net investment income reported by certain high-income taxpayers—this surtax could be abolished.
In addition, President Trump urged far-reaching changes to the Internal Revenue Code. Full details of this plan have yet to be revealed but could include lower tax rates for individuals and businesses. As an offset, some itemized deductions, including those for medical expenses, as well as state and local taxes, could be eliminated.
How can you plan for tax savings at year-end in this environment? One step you can take is to schedule a tax planning meeting in late 2017. By November or December, we may know more about changes to the tax code and the effective dates.
For now, a basic strategy might be to delay certain income-generating events until 2018 and to accelerate deductions into 2017, when practical.
Example: Marge Wilson is planning a sale of income-producing property, which she expects to produce a substantial long-term capital gain. Marge anticipates that such a gain would be taxed at a 20% rate, as well as the 3.8% surtax on net investment income. Unless there is a pressing reason to close the deal by the end of 2017, Marge could wait until 2018 in the hope of avoiding the 3.8 percent surtax.
Regarding health insurance, business owners, employees, and self-employed individuals should weigh the pros and cons of high deductible plans when choosing coverage for next year. High deductible policies may be linked with health savings accounts (HSAs), if certain requirements are met. HSAs, in turn, offer unique tax benefits: deductible contributions, untaxed investment income inside the account, and tax-free distributions for qualified healthcare. However, high deductible health plans may lead to greater expenses for medical care before the insurance takes effect.
Deferring income may pay off if Trump’s tax plan leads to lower rates. Self-employed individuals might consider delaying year-end billing for work done in hopes they will owe tax at, say, 25% instead of 28% or 33%.
The proposed demise of certain itemized deductions might be worrisome. In some circumstances, accelerating expenses for medical bills, state estimated tax, and property tax from 2018 to 2017 could provide deductions in 2017 that might no longer be available in 2018. At year-end tax planning meetings, our office can recommend moves that are suitable in your specific situation.