The House has passed their version of the Tax Reform bill and the Senate Finance Committee has approved a bill which will now be debated, amended, and voted on by the full Senate. The bill passed by the Senate will be different from the one passed by the House. The differences will be ironed out by the joint House-Senate Compromise Committee and then voted on by the full House and Senate, which cannot be amended.
This process may not be completed until the end of the year which will not leave much time for taxpayers to do effective planning to minimize their 2017 taxes. Due to the uncertainty of the final law’s provisions, this article makes suggestions how taxpayers can minimize their 2017 taxes. Part I explains ways to minimize income and Part II explains ways to increase deductions.
Part I Minimizing Income
(A) Deferring Income: Tax rates will likely be lower for most tax payers starting in 2018. If a taxpayer attains age 70 1⁄2 in 2017, a required minimum distribution from your tax deferred retirement plan should be deferred until April 1, 2018. If you are expecting a year-end bonus, ask your employer to pay it in 2018 instead of 2017.
(B) Make or increase contributions to retirement plans:
(1) defined contribution (salary reduction) (401(k), 403(b), and government plans. For 2017, employees may contribute the lesser of 100% of compensation or $54,000. These contributions reduce the amount of income reported on form 1040 and the tax withheld from wages.
(2) Regular IRA. This is allowed only if the taxpayer and/or spouse are not an active participant in an employer or self-employed retirement plan. The maximum contribution and deductible amount for 2017 is the lesser of earned income (including alimony) or $5,500 ($6,500 if age 50 or older) deductible FOR AGI. The contribution must be made by April 15,2018 (NO extension is allowed). For married taxpayers, a deduction up to $11,000 ($13,000 if both are age 50 or over) may be made even if only one spouse works but combined AGI must be at least $11,000. It can only be made until age 70 1⁄2. If a taxpayer defers the 2017 contribution until 2018 and also makes a contribution in 2018 for tax year 2018, you must designate that the 2017 contribution made in 2018 is for tax year 2017 or there will be a penalty for excess contributions. If you are short of cash,you can borrow money to make a contribution without jeopardizing the deduction. The deduction is phased out when AGI (2) exceeds $99,000 on a joint return ($186,000 if the spouse is not a plan participant) and $62,000 for single, married filing separate, and head-of-household. If you are self-employed, you may make an IRA contribution in lieu of a SEP plan. The contribution is limited to net earnings, reduced by 1⁄2 of self-employment tax. If you have a net loss, no deduction is allowed. Form 5606 is used to compute the deduction and is transferred to form 1040, line 32. To minimize your income, the contribution should be made by December 31, 2017.
(2-a) Required Minimum Distribution. At age 70 1⁄2, taxpayers must take a minimum distribution each year from their tax deferred retirement accounts measured by the value of the account at the end of the preceding tax year divided by a life expectancy factor from the IRS Uniform Life Expectancy table. Your plan administrator can tell you how much the distribution is. In the year the taxpayer reaches age 70 1⁄2, the distribution can be deferred until April 1 of the following year, but in subsequent years it must be taken by December 31.Taxpayers who have not taken a required minimum distribution must do so or pay a penalty of 50% of the difference between the required minimum distribution(after any charity donation) and the amount received.
(2-b) Roth IRAs. Contributions can be withdrawn tax free anytime but the earnings will be taxable if withdrawn before age 70 1⁄2.. If the withdrawals are made to pay students education expenses, the withdrawal will be income to the student which could affect their financial aid package.
(3) Simple IRA This is allowed for employers who have 100 or fewer employees and no retirement plan. The amount of the contribution and deduction is the lesser of $12,500 of net earnings or $5,500 ($6,500 if age 50 or older), plus a matching amount up to 3% of net earnings. The deduction is reported on form 1040, line 28.
(4) Self Employed Plans (SEP). This deduction is reported on form 1040, line 28 and is limited to $54,000 or $200,000 maximum net earnings,less 1⁄2 of self-employment tax, multiplied by a decimal factor for the contribution rate of 1-25% from the IRS table. The contribution must be made by December 31. If the plan is established in 2017, the date is extended to April 15, 2018 (October 15, if you received an extension to file).
(C) Minimize capital gains. If you have large realized capital gains this year, consider selling securities with a unrealized loss to reduce the capital gains which are also subject to an additional net investment tax if AGI exceeds a certain amount. Be sure to sell stock or equity mutual funds on or before the ex-dividend date to get the dividend declared (your broker can tell you the ex-dividend date). Even if you don’t own the securities on the payment date, you will receive the dividend if the securities are owned on the ex-dividend date. If sold before ex-dividend date, you will not receive the dividend. Net long-term (held (3) more than 12 months) gains are taxed not taxable or taxed at a lower rate depending on your tax bracket. Net short-term (held more 12 months or less) gains are taxed as ordinary income. To minimize your 2017 tax, sell securities held longer than 12 months. You can deduct up to $3,000 of losses in excess of gains from other income. Any excess can be used to offset capital gains and up to $3,000 of other income in future years.
(D) Non-taxable bonds. If you own state or local general obligation bonds, the interest income is not taxable. If you plan to buy revenue bonds used to finance athletic facilities, purchase them in 2017 because,under the proposed tax law, interest on these bonds will be taxable starting in 2018.
(E) Avoiding an underpayment penalty. For 2017, taxpayers must pay in through withholding and/or estimated tax payments at least 90% of 2017 taxes or 100% of 2016 taxes owed (110% if AGI exceeds $150,000).To avoid this penalty, increase your December withholding or 4th quarter estimated tax payment.