Only a Few Days to Act for 2017!With only days to go to get something done for 2017 tax savings, we will keep this short and sweet and focus on exactly what you may need to consider doing right now. More to come in 2018 regarding the significant changes associated with the Tax Cuts and Jobs Act that was signed into law by President Trump.
HIGHLIGHT # 1 – FOR CLIENTS WITH 2017 STATE INCOME TAXESBeginning in 2018, the maximum combined Federal tax deduction allowed for state and property taxes is $10,000. This deduction used to be nearly unlimited for most of our clients. If Q4 2017 taxes are paid in January 2018, they will be subject to the new deduction limit.
Consider paying any unpaid 2017 state taxes prior to year-end. In order to be reported as a 2017 payment, it likely needs to be withdrawn from your bank account by 12/31/2017. Some states provide online systems through which tax payments may be made faster.
- If you’re subject to alternative minimum tax (AMT), you may lose the benefit of making this extra payment. The catch-22 is that state and property tax deductions are a preference item that helps to trigger the AMT. For some clients, there will be a sweet spot of how much to pay in order to not lose the deduction. There’s no good way to know without working with an accountant to run your AMT calculation.
- If you overpay your state taxes, you are letting the government hold on to more of your money, which some consider is like giving them a free loan. Depending on when you file your taxes will determine how long you’re letting the government borrow your money.
- If you underpay your state taxes in 2017, you potentially risk losing out on the up to 39% Federal tax deduction. Every dime you underpay in 2017 but then pay in 2018 may not be deductible if you exceed the $10,000 cap for taxes paid.
HIGHLIGHT # 2 – FOR CLIENTS WITH 2018 STATE OR PROPERTY TAXESSome clients have inquired if they are eligible to prepay their 2018 state or property taxes in order to take a 2017 deduction. The only answer we know right now is “maybe.”
State Taxes are Supposed to be Clearly Defined but…
Congress saw fit to eliminate one’s ability to prepay 2018 state taxes and thereby get a deduction in 2017 for those taxes paid. The Tax Cuts and Jobs Act specifically addresses this strategy and prohibits it. However, some accountants are discussing a more aggressive approach suggesting that the legislation makes it unclear as to what may occur if you overpay your 2017 state taxes and then elect to apply your refund to your 2018 taxes. In that instance, a deduction for 2017 may still be possible because you cut the check for “2017 state taxes” rather than directly for “2018 state taxes”.
Property Taxes Are More Clearly Defined but It’s Still Messy
Unlike state taxes, the Tax Cuts and Jobs Act does not specifically address and prohibit the deduction of prepaid property taxes. It’s up to your county if you can prepay your property taxes. Again, the funds will likely need to be withdrawn from your account prior to 12/31/2017, so you may need to use an online payment system. Contact your county to learn more about whether or not this is an option. If you pay your property taxes through escrow, you will likely need to work with your bank to figure out how to adjust for property taxes you pay outside of escrow.
- Taking a deduction you’re not entitled to is bad news. You may owe interest, penalties, and back taxes if this deduction gets thrown out.
- And there’s that whole AMT thing (…that approximately 7 of us actually understand). Every dollar you add to state or property tax deductions could put you at greater risk to hit the AMT threshold and thereby lose the benefit of the deduction.
HIGHLIGHT #3 – FOR CLIENTS NOT WORKING WITH A STRATEGIC CPAThese new tax laws create some really important considerations for high income families. We have seen numerous instances where important tax deductions and strategies have been missed by those who do not work with a CPA, and strongly suggest our clients work with a qualified tax professional. There are a number of great CPAs in our Doctor’s Only network that we would be happy to introduce you to, in order to review your specific tax questions. If your CPA has been proactive with you, we would love to hear about it, as we are always looking to build more relationships with strategic CPAs.
CONCLUSIONAs mentioned above, there is more to come in 2018 regarding strategies to employ in response to the new tax laws. However, we believe these are the most pressing items to consider before the end of 2017. Please do not hesitate to call us if you have any questions!
Disclaimer: The material is provided for informational and educational purposes only. Larson Financial Group, an SEC Registered Investment Advisor, and Larson Financial Securities, Member FINRA/SIPC do not provide legal or tax advice. Contact your qualified legal or tax professional regarding such advice.