Financial Planning

Post-Tax Reform Year-End Considerations

There is still time to take stock of your tax situation and prepare for next year.

Whether you like or loathe the tax bill President Trump signed Friday morning, you can emulate Congress in one respect—by tackling tax matters before the year is up. With 2017 drawing to a close, here are a few items you may wish to review with a tax adviser. Doing so now can help make next year’s tax season run a little smoother while ensuring you make the best of new tax rules.

Because the Tax Cuts and Jobs Act (which we analyzed here) doesn’t take effect until the 2018 tax year, taxpayers will file one last time under existing rules. This means there is a narrow window of time for folks to potentially reduce their liabilities both this year and next.

Should I defer income?

If it appears your taxes will be lower next year and you control when you receive income, you might consider delaying collection until January. (This is more feasible if you own your own business and can wait to send out invoices for a couple weeks.) Don’t do anything shady, though—the IRS can spot tactics like sending a bill this year and asking for payment next or depositing checks containing 2017 income in 2018.

Should I prepay 2018 property taxes?

Previously, state and local income and property taxes were fully deductible. Starting next year, deductions will be capped at $10,000. If you will owe more than this, prepaying looks attractive—and you might be able to, in part. The bill mandates prepaid 2018 state and local income taxes must go on 2018 returns, but property tax prepayments have more flexibility. Thus, if you plan to itemize this year and it is possible to do so, paying at least a portion of next year’s property taxes now could boost your deductions in 2017.

Should I high-tail it for a lower-tax state?

In the lead-up to the bill’s passage, many worried citizens of high-tax states would be huge losers if state income tax deductibility went away. Even though it didn’t, the cap may ding some higher-income folks in tax-happy states. But before you break out the moving boxes, be sure to do the math (ideally alongside a tax adviser). The effects of losing the full state income tax deduction may not be as large as you think, especially now that property taxes don’t get special treatment. (In the House’s first bill, property taxes up to $10,000 were deductible, while income taxes weren’t.) Once you factor those in, Texas becomes a high-tax state despite its lack of state income tax.

Taking RMDs

RMD stands for Required Minimum Distribution—the lowest amount many retirees must withdraw each year from tax-deferred retirement accounts such as 401(k)s and traditional IRAs.[i] If you own such an account and turned 70 ½ this year, you generally must start taking distributions before April 1, 2018. Anyone who was already 70 ½ or older entering this year must take their RMD by December 31. Failure to take the distribution by the deadline brings penalties of up to 50% on the balance.

RMDs are taxable events, but if you don’t need the income and want to mitigate the tax impact, talk to your tax adviser about using the charitable donation deduction—you can donate stock from your IRA. For folks over 70 ½, $100,000 or less in stock gifts aren’t taxable. This means you can put them toward your RMD—and claim the charitable gift deduction to boot.

Maxing out contributions

Filling retirement and other savings accounts to the brim before year-end is often a smart tax and savings move. To see if you haven’t yet, compare your year-to-date contributions to qualified accounts to the IRS’s permitted maximums for 2017—$18,000 for 401(k)s, $5,500 for IRAs and a varying amount (depending on your situation) for college savings (529) plans.[ii] Folks 50 or older can also take advantage of catch-up contributions—$6,000 for 401(k)s, $1,000 for IRAs.

IRA musical chairs

Rolling over traditional IRAs and 401(k)s to Roth accounts may be wise, but it depends on your tax and income situation—again, ask an adviser. Roths are popular because they allow tax-free withdrawals—but they are funded with after-tax dollars, so you would have to pay the piper if converting a tax-deferred account. It is a tradeoff.

Whether you are considering a conversion now or made one this year, take note: The new tax bill prevents folks from undoing past conversions. (Originally, you could undo it until October 15 of the following year.) Once you do it, you are stuck with it. So make sure you have enough liquidity to pay the taxes on a conversion you complete this year.

Charitable deductions

These allow you to support worthy causes while lightening your tax load. Tax reform didn’t touch these, but it did introduce a couple wrinkles. If your taxes will fall next year, you might consider pulling forward contributions to 2017. Likewise, if the new tax regime’s higher standard deduction means you won’t itemize in the 2018 tax year (but will this year), boosting giving this year may make sense.

Another tip: If you are thinking of selling stock to make a donation and the stock has long-term capital gains, consider an in-kind donation instead. If you sell the stock, you will have to pay capital gains taxes. If you gift the stock, you may skip capital gains and claim the charitable deduction—while the receiving organization gets a stepped-up cost basis.

Tax loss harvesting

In taxable accounts, selling securities for a profit is a taxable event. If you owned the security for less than a year, it is a short-term capital gain and taxed at ordinary income rates. If you owned it longer than a year, it is a long-term capital gain, subject to the aptly named capital gains tax. If you own stocks with long-term unrealized losses, you can sell them and offset some or all of your realized gains, lowering your tax burden.[iii] This is called harvesting losses.

If you harvest losses this year, avoid falling afoul of “wash sale” rules, which bar investors from declaring tax losses if they repurchase the security within 30 days. Buying replacement securities is generally fair game, though, if you don’t want to sit in cash for a month during a bull market.

One final note in this giving season: While donating stocks with long-term capital gains to charity spares you from capital gains taxes, as described above, you can still claim a capital loss if you donate the cash from selling losing stocks.



[i] Roth IRAs aren’t subject to RMDs during the owner’s lifetime, but beneficiaries become subject to them after the original owner’s death.

[ii] Know who would have a more specific answer on how much you can contribute to a 529 plan? Your tax adviser! Give them a call.

[iii] Happily, the tax bill doesn’t mess this up—the final version ditched a rule (FIFO, or “first in, first out”) that would have required investors to sell securities in the same order they bought them.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.