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Tax Cuts and Jobs Act Of 2017: What to Do Before Year End
How to Maximize deductions that are soon going away
The final version of the Tax Cuts and Jobs Act was released last Friday and is widely expected to be signed into law this week. The new law includes a lot to like for families, as most of us will see a reduction in taxes (at least until sunset provisions hit in 2025).
Most individual tax brackets were reduced by a few percentage points, with a new top rate of 37%. In addition, corporate tax rates have been cut to 21% from 35%, and small businesses can qualify for a 20% income deduction.
The tax bill’s impact on the economy and personal tax planning will continue to play out over the coming years. However, there are a few ways you might be able to lower your next tax bill by taking simple action before December 31, 2017. As always, check with your tax advisor before making any decisions.
Maximize deductions that are going away
The new law puts a $10,000 cap on State & Local Income Tax and Property Tax deductions. This is the combined total of these items, meaning that if you live in state with income tax and own property, chances are good you will be losing some deductions next year.
- Consider paying all your 2017 state income tax by December 31, 2017. If you typically owe money to the state when you finish filing, pre-paying state tax by year end (as opposed to waiting until next April) will allow you to keep this valuable deduction. Note that the new law prohibits deductions for pre-payment of 2018 state income tax due, so this is a one-time only exception for 2017 income. Check with your tax advisor if you will be subject to the AMT, which could limit any deduction.
- Consider pre-paying some of next year’s property taxes by year end. If your property tax is greater than $10,000 (or your combined property and state tax will be greater than $10,000), you might also pre-pay some of next year’s property tax by December 31, 2017 and keep your deduction. This move will also lower the amount of deductions “used up” toward next year’s $10,000 cap.
- Generally, look to defer income into the lower tax brackets next year. Income earned next January is more valuable than an equal amount earned this December because of the lower rates. Likewise, anything you can do to lower your 2017 income before year end may be beneficial, such as maximizing your 401(k) or making additional charitable contributions.
As the country digests the new tax bill there will likely be many more longer-term planning opportunities to consider. But with a major piece of tax legislation likely to be signed with less than two weeks before the new year, consider the above options as your way to take advantage of the new rules now.