Year-End Tax and Financial Planning Ideas

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After the 2016 presidential election, we knew that 2017 was going to mean a change in direction for the country. President Trump ran on a platform of reform, which seemed to signal a new frontier for tax and financial-planning strategies. So a year later, where do we stand?

As we near the end of the year, the prospect of significant tax reform grows by the day. Although these reform proposals appear unlikely to affect 2017, 2018 could see more significant changes than we’ve seen in years. The House issued the opening bid when it comes to reform with the release of the Tax Cut and Jobs Act November 2. This bill contained many of the proposals we expected:

  • Consolidated tax brackets with lower marginal rates at most income levels.
  • An elimination of many of the deductions we’ve become accustomed to, including personal exemptions, state income taxes and medical expenses. To offset these, the standard deduction would be greatly expanded.
  • An expansion of the child credit.
  • A repeal of the estate tax and the Alternative Minimum Tax.
  • Reduced tax rates on businesses, including those operating as a “pass-through”, such as partnerships and sole proprietorships.

The bill had plenty of surprises, as well, including provisions affecting homeowners, a loss of deductions we didn’t expect (such as alimony payments) and significant changes to education-related tax benefits. These proposals are far from reality yet, however. To begin with, the Senate will be issuing their own proposal in the coming days, and then the two bills will need to be consolidated into one that can pass both sides of Congress. And all of this will have to be done with only Republican votes, as Democrats remain united in opposing these reforms.

Because of the prospect for lower rates and fewer deductions for 2018, the traditional recommendation to defer income/accelerate deductions may be even more applicable this year. Pushing income into 2018, where it might be taxed at a lower rate, could be appropriate, although most individuals don’t have the flexibility to do that. On the other hand, if most deductions are eliminated next year and are replaced with a new, larger standard deduction, there is added incentive to make charitable gifts and pay medical expenses or state income or property taxes before the end of 2017.

As always, tax planning is an individual process. The approach that is generally good for most may be the exact wrong thing in your own situation. Taxpayers whose income will fluctuate significantly between 2017 and 2018 – due to job change, retirement, sale of a business, etc. – might consider different year-end strategies. Remember also that tax planning is not done in a one-year vacuum. The decision to accelerate or defer income or deductions should be done with an eye towards the tax impact over both this and next year. Lastly, be sure to look at any changes to state income tax laws in the context of year-end tax planning.

The following list of year-end tax and financial planning strategies is a starting point to discuss with your financial advisor along with your tax consultant. While investment decisions shouldn’t be driven entirely by tax issues, there are instances where sound investment decisions can be made that will decrease an investor’s overall tax liability. It could be that if tax reform is, in fact, passed this year, that the recommendations made below would need to be revised, so be sure to stay aware of any new developments.