Now is an ideal time to assess your tax situation and evaluate strategies that may help minimize your future tax bill. This article highlights several changes in the tax law as well as potential tax-saving opportunities for you to consider.
Basic Numbers You Need To Know
Many tax benefits are tied to or limited by adjusted gross income (AGI). Therefore, a key aspect of tax planning is to estimate your AGI for the year.
Another important number is your marginal tax rate, i.e. the rate at which your last dollar of income is taxed. The 2017 federal tax rates for individuals are 10%, 15%, 25%, 28%, 33%, 35% and 39.6%. Although tax brackets are indexed for inflation, if your income increases faster than the inflation adjustment, you may be pushed into a higher bracket.
IRA and Retirement Savings
Maximizing contributions to a retirement plan is one way to potentially reduce your AGI for the year. We have enclosed a table summarizing the contribution limits to various types of retirement plans.
Roth IRA Conversions: It may be advantageous to convert traditional IRAs to Roth IRAs.
Required Minimum Distributions: Traditional IRA owners over age 70 ½ must receive a required minimum distribution (RMD) from their IRA each year.
Deduction timing is an important element of year-end tax planning. Deduction planning is complex due to factors such as AGI levels, filing status, and the alternative minimum tax (AMT).
AGI Limits: Certain deductions may be claimed only if they exceed a percentage of AGI: 10% for medical expenses, 2% for miscellaneous itemized deductions, and 10% for casualty losses. The phase-out of itemized deductions and personal exemptions for high-income taxpayers from the Affordable Care Act is in effect as well.
State Taxes: If you anticipate a state income tax liability for 2017 or plan to make a fourth quarter estimated payment, consideration should be given as to whether the payment should be made in 2017 or 2018 to yield the highest tax benefit. Even if you are subject to AMT, you may still benefit from prepaying your state income tax. Also, Congress reinstated and made permanent the option to deduct state sales tax instead of income tax if this yields a higher deduction.
Mortgage Interest: The IRS has expanded the reporting form for mortgage interest, Form 1098, to include address of property securing the mortgage, mortgage origination date, and outstanding mortgage principal balance as of the end of the year.
Charitable Contributions: To avoid tax on capital gains, consider contributing appreciated property to charitable organizations. The fair market value of the property is deductible as a charitable contribution if you have owned the property more than 1 year (subject to limits based on your adjusted gross income). If you own stock in certain companies that will soon be acquired in a taxable sale, you may still have time to contribute this stock to charity. The contribution must be made prior to final approval of each deal.
For those 70 1/2 or older, a distribution sent directly to a charity from an IRA may be excluded from federal adjusted gross income.
You can use a credit card to charge and deduct donations in 2017 even though the bill is paid in 2018.
The IRS requires documentation to substantiate your charitable contributions. We have enclosed a schedule summarizing the substantiation requirements for common donations.
Bonus Depreciation and Section 179 Expensing: A 50% bonus depreciation allowance is available for qualified property placed in service in 2017. Bonus depreciation is reduced to 40% in 2018 and 30% in 2019.
For 2017, up to $510,000 of furniture and equipment purchased for your business can be expensed rather than depreciating the assets (Section 179 expensing).This amount is reduced when the cost of qualifying property exceeds $2,030,000. The deduction and phase-out amounts are indexed for inflation each year ($520,000 and $2,070,000 projected for 2018).
Health Savings Account (HSA): If you are covered by a high-deductible health insurance plan, establishing and contributing to a health savings account prior to April 17, 2018 will yield a tax deduction for 2017. Contributions up to $3,400 for individual coverage and $6,750 for family coverage are deductible. The 2018 contribution limits are $3,450 for individual coverage and $6,900 for family coverage. An additional contribution of $1,000 is allowed for individuals age 55 and over. Contributions are not permitted after age 65. Distributions from an HSA can be used to pay for medical care including transportation costs and parking.
Qualifying tax credits reduce tax liability dollar for dollar. A few of the more common tax credits are discussed below.
Energy Property Credits: A credit for eligible energy-efficient improvements (furnaces, air conditioners, doors, windows, insulation) was available for 2016 up to a $500 lifetime limit. This credit expired after 2016.
Education Credits: The American Opportunity and Lifetime Learning credits are available to offset costs of higher education. In some instances it may be beneficial to forego your college-age child’s dependency exemption so your child may claim the credit. Form 1098-T is required in order to claim the American Opportunity credit. Another higher education tax benefit, the Tuition and Fees Deduction, was available for 2016, but was set to expire afterwards. The credits and deduction are phased out at relatively low levels of adjusted gross income.
The following rules apply for most capital gains and losses in 2017:
Tax Rates: Capital gains are taxed at an individual's ordinary income tax rate for property held one year or less and at a maximum rate of 20% for property held more than one year. For 2017, there is a 0% tax rate on long-term capital gains for taxpayers in the 10–15% tax bracket, a 15% tax rate on long-term capital gains for taxpayers in the 25-35% tax bracket, and a 20% tax rate on long-term capital gains for taxpayers in the 39.6% tax bracket.
Additionally, there continues to be a net investment income tax of 3.8% for taxpayers with Modified Adjusted Gross Income above $200,000 (single) or $250,000 (joint). Net investment income includes interest, dividends, royalties, rents, trade or business income from passive activities, and net gains from dispositions of property (not used in a trade or business).
Timing of Sales: The timing of the sale of capital assets should be considered in order to minimize the potential tax impact of the sale.
Capital Losses: Capital losses may be fully deducted against capital gains and can offset up to $3,000 of ordinary income ($1,500 for married filing separately). Unused losses carry forward to future tax years.
Dividends: Qualified dividends are subject to the same tax rates as capital gains (but cannot be offset by capital losses).
Gift and Estate Planning
You may want to consider giving appreciated or other property to children or grandchildren if they are in a lower tax bracket than your own. You can transfer $14,000 per person, per year, without paying gift tax on the amounts transferred or using any of your lifetime exemption ($5,490,000 for 2017 and $5,600,000 for 2018). Your spouse can agree to "gift-split", thus doubling the amount of these gifts. Gifts made by check must be cashed by December 31 for the gift to be considered a 2017 gift. The annual gift tax exclusion for 2018 will increase by $1,000 to $15,000 per person.
You can make unlimited gifts on behalf of a donee for tuition paid directly to an educational institution or for medical services paid directly to health care providers. These payments may be made in addition to the $14,000 annual exclusion amount.
Making lifetime gifts not only shifts income, but is also an effective way to reduce your taxable estate at death. For 2017, the federal estate tax rate is 40% on estates exceeding $5,490,000. Estates over $2,100,000 are subject to the Minnesota estate tax, with the exemption increasing $300,000 per year until 2020. The Minnesota estate tax rate, which is now a graduated rate, ranges from 10% to 16%.
You may need to coordinate your tax return preparation with that of your children due to the “kiddie tax”. Most individuals under age 24 with full-time student status and over $2,100 of investment income are subject to the kiddie tax. As part of the kiddie tax calculation, your income is reported on your child’s return and is used in calculating their tax liability for 2017.
Alternative Minimum Tax
Some of the standard year-end planning ideas will not reduce tax liability if you are subject to the alternative minimum tax (AMT) because different rules apply.
Additional Medicare Tax
In addition to the 1.45% Medicare tax on wages, single people earning more than $200,000 and married couples earning more than $250,000 will be taxed at an additional 0.9% (2.35% in total) on the excess over these base amounts. The $200,000/$250,000 thresholds are not indexed for inflation, so it is likely that more and more people will be subject to the higher taxes in coming years.
Health Insurance Individual Mandate Penalty
The Affordable Care Act imposed penalties for individuals who do not have qualifying health care coverage. The penalties for individuals without qualifying coverage for 2017 are $695 per adult or 2.5% of household income above the filing threshold, whichever is higher.
Minnesota Income Tax
For 2017, investors are eligible for a refundable income tax credit for investing in certain small Minnesota businesses. The credit is equal to 25 percent of new investments in a qualified business. The maximum credit is $125,000 ($250,000 married filing jointly). The Department of Employment and Economic Development must pre-certify investors, investment funds and businesses as being eligible to participate in the credit program. Investors need not be residents of Minnesota.
The Minnesota research and development credit is 10% of the first $2,000,000 of qualifying expenditures and 2.5% for eligible expenses above $2,000,000. C Corporations and pass-through entities are eligible for the credit. Individual partners of partnerships and shareholders of S corporations are allowed to claim the credit against their individual income tax. The credit is not refundable if the tax credit exceeds the tax liability.
New for 2017, there is a Section 529 Plan Credit for Minnesota residents and part-year residents who contribute to a qualified Section 529 College Savings Plan and meet certain income guidelines. The allowed credit is a maximum of $500 or 50% of contributions made during the year. For married couples filing joint returns, the credit phases out completely at $160,000 of adjusted gross income. Also, new for 2017, is the Section 529 Plan Subtraction for individuals who contribute to a Section 529 College Savings Plan. The Section 529 Plan subtraction from income allowed is $3,000 for married couples filing joint returns and $1,500 for all other filing statuses.
Beginning in tax year 2017, taxpayers must accelerate recognition of their gains from an installment sale of any interest in, or assets of, a pass through entity if they are a non-resident at the time of sale, or become a non-resident during the period they receive installments.
Minnesota has a credit for parents of stillborn children and a subtraction from taxable income for recipients of certain military retirement pay.
Report of Foreign Bank and Financial Accounts
The due date for filing FinCEN Form 114, Report of Foreign Bank and Financial Accounts has been moved up from June 30 to April 15. A six-month extension can be requested.
Form W-2/Form 1099
The due date for filing 2017 Forms W-2, W-3, and certain Forms 1099-MISC has been moved up to January 31, 2018. The penalty for filing late or incorrect information returns ranges from $50-$260 per form. The penalty for not filing information returns is a minimum of $530 per form for tax year 2017.
Also, the due date for filing 2017 Forms W-2 and required Forms 1099 for Minnesota had been moved up to January 31, 2018 which matches the IRS filing due date. In addition, the due date for employers who qualify to file and pay their withholding taxes annually must now do so by January 31, 2018 for tax year 2017.Contact