As the year-end holidays approach, add some tax cheer for 2017. In fact, you can still make timely tax moves as late as the last week of the year. Consider these five tax-saving stocking stuffers.
1. Charitable donations. Bolster your deduction for charitable contributions with a late donation. Generally, you can deduct the full amount of a donation charged by a credit card as late as Dec. 31, even if you don’t pay the charge until 2018. Keep adequate records to back up your claims.
2. Capital losses. There’s still time to avoid a big capital-gains tax from securities sales. Any losses “harvested” during the last week generally offset capital gains plus up to $3,000 of high-taxed ordinary income. And, if you still have a remaining loss, it is carried over to next year to offset gains in 2018.
3. Mortgage interest. If the mortgage is due Jan. 1, 2018, you can increase your mortgage interest deduction for 2017 by prepaying it. In effect, you deduct 13 months’ worth of interest. But there’s a catch to using this strategy now: You must do it again next year (and so on) to keep deducting 12 months’ worth of interest.
4. Tuition. Similarly, if you have a child in college and tuition for the next semester is due in January, you can prepay it in December. The tuition payments generally count toward either one of two higher education credits — the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC) — for 2017. But both credits are subject to phase-outs based on income.
5. Tax advice. Finally, if you pay for tax-related services before the end of the year (including subscriptions to tax publications) the cost qualifies as a miscellaneous expense. You can deduct annual miscellaneous expenses above 2 percent of your adjusted gross income (AGI). Even fees paid to your tax advisor for year-end tax planning count.
Tax reform talk is heating up again as legislators discuss the proposed tax code overhaul. One of the key proposals would repeal most itemized deductions currently on the books. Although enactment is hardly guaranteed, taxpayers should be aware of the potential impact.
Under current law, some of the most popular itemized deductions include the following:
- Donations made to qualified charitable organizations are deductible under generous limits, subject to strict substantiation requirements.
- State and local taxes, including income taxes and property taxes, are fully deductible. State and local sales taxes may be deducted in lieu of income taxes.
- Qualified mortgage interest, including amounts paid on an acquisition debt up to $1 million, is deductible.
- Investment interest may generally be deducted up to the amount of your net investment income for the year.
- You can deduct the excess unreimbursed medical and dental expenses above 10 percent of your adjusted gross income (AGI) for the year.
- You can deduct the excess miscellaneous expenses (e.g., unreimbursed employee business expenses and tax advisory fees) above 2 percent of your AGI for the year.
- You can deduct unreimbursed casualty and theft losses above 10 percent of your AGI for the year (after subtracting $100 for each casualty and theft loss).
Under the proposed House plan unveiled on Nov. 2, the deduction for charitable donations and disaster-area casualty losses would be preserved, while certain modifications would be made for mortgage interest and state and local property tax deductions. Other itemized deductions would be repealed.
Are you trying to sell investment or commercial real estate? If you use an installment sale to help sell real estate, you can benefit from tax deferral and possibly lower your overall tax bill. But watch out for a little-known tax trap.
Here’s what to know
Generally, installment sale treatment is automatic for a sale where you receive payments in the tax year of the sale and at least one other tax year. For instance, if you sell real estate in 2017 and receive payments in both 2017 and 2018, you qualify. Part of the tax due on your gain is taxable in 2017 and part is taxable in 2018.
Note that real estate held longer than one year qualifies for favorable treatment of the capital gains tax. The maximum tax rate on long-term capital gains is only 20 percent, compared with the top ordinary income tax bracket of 39.6 percent.
Why an installment sale may be worthwhile
With an installment sale, you may benefit from the lower tax rate in several years by spreading out payments over time. This reduces your overall tax liability.
Caution: If you sell property to a related party that is then disposed of within two years, all the remaining tax comes due (barring certain exceptions). The tax law definition of “related parties” is more expansive than you might think. It includes:
- A spouse
- A partnership or corporation in which you have a controlling interest
- An estate or trust you’re connected to
Avoid any dire tax results by stipulating in the contract that the property can’t be disposed of within two years.
Finally, be aware that installment sale treatment is only available for gains, not losses. Other special rules may apply, so contact Dye & Whitcomb and we can take a look at your specific your situation.