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Tax-Saving Strategies for Everyone Before December 31, 2017

The Tax Cuts and Jobs Act is expected to be signed into law today…. let’s see – and, of course, we will update you accordingly.

Generally speaking, income tax rates will be lower in 2018 than they are in 2017.

Additionally, less people will itemize deductions in 2018.  There are a few reasons for this.  The main reason is that the standard deduction is increasing from 2017 ($6,350 for single filers and $12,700 for married filing jointly) to 2018 ($12,000 for single filers and $24,000 for married filing jointly).  Also, beginning in 2018, taxpayers cannot claim more than $10,000 of itemized deductions for state and local taxes, which includes real estate taxes.

Due to this change in law in late December, there is a short window of opportunity to take advantage of these changes.  The following are some strategies that may be beneficial to you:

Pre-Pay Your 2018 Real Estate Taxes

Due to the increased standard deduction, and the $10,000 cap on the deduction for state and local taxes, it could be more beneficial to pay your 2018 real estate taxes before December 31 and claim the additional itemized deduction on your 2017 federal income tax return.

Real estate tax bills have not been released yet, but they generally do not change significantly from year to year.  Contact your local real estate tax collectors to arrange payments before December 31.

Pay the Remainder of Your Estimated State and Local Income Taxes for 2017

Your state and local income taxes for your wages should be completely withheld from your paychecks.  However, if you have income that is not subject to withholding (i.e. dividends, interest, capital gains, rental income), then you likely have paid the tax for this additional income when you file your tax returns the following April.

This year, estimate what that additional tax payment may be and pay it by December 31.  You can claim that payment as an additional itemized deduction on your 2017 federal income tax return.

Accelerate Your Charitable Deductions

If your standard deduction in 2018 will be greater than your itemized deductions, then it would likely be more beneficial for you to make any potential 2018 charitable contributions in 2017.  This will increase your itemized deductions for 2017.

If you want to make charitable contributions in 2018 but are unsure as to which charities you want to receive your contributions, you can set up a donor advised fund and fund it in 2017.  A donor advised fund would then allow you to advise the financial institution as to which charities should receive the funds at a later date.

Also, as a planning technique for every tax year (not just this year), if you have an option of donating cash or highly-appreciated stock, it is in your best interest to donate the highly appreciated stock.  Speak with your personal tax advisor regarding the benefits of this.

Pay January Mortgage in December

Every mortgage payment is comprised of principal and interest.  You are able to claim your mortgage interest as an itemized deduction.  If itemized deductions will be beneficial for you in 2017, but not 2018, then make your January 2018 mortgage payment a few days early (i.e. before December 31) so that you can claim some additional mortgage interest as an itemized deduction on your 2017 federal income tax return.

Recognize Capital Losses

If you own stock that has lost value, you can sell that stock and claim as much as $3,000 as a deduction against your other income.  Because taxpayers generally will be paying taxes at a higher rate in 2017 than they will in 2018, this deduction for capital loss becomes even more valuable in 2017.

Let’s run through a quick example.  Assume a Pennsylvania married couple files their income tax returns jointly and has no children.  They annually report $200,000 of wages and $10,000 of dividends.  They generally donate $2,000 per year to their favorite charities.  They own their house, and pay approximately $7,000 of real estate taxes per year and $5,000 of mortgage interest per year.

If this hypothetical does what they do every year, they’ll end up owing $35,917 of federal income tax for 2017 and $32,319 of federal income tax for 2018.

However, if they (1) pay $7,000 of 2018 real estate taxes in 2017, (2) make a payment to Pennsylvania in 2017 for $307 (the state income tax owed for the 2017 dividend income), (3) donate $4,000 to their favorite charities in 2017 and nothing in 2018, and (4) pay their January 2018 mortgage payment in December 2017… then their federal income tax for 2017 would drop to $33,195 for 2017 and remain $32,319 for 2018.

For more hypothetical situations that may help you better understand, check out this article from CNN.

In summary, this couple would save $2,722 on their 2017 federal income taxes if they implemented some of these simple strategies.  Get in touch with your tax advisors immediately and determine whether any of these strategies will personally benefit you if you implement them by December 31.

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