As promised in our recent Harvester newsletter that we sent on December 7, 2017, we want to update you on the Tax Cuts and Jobs Act (the “Act”). The Act made it through the conference committee and was passed by both the House and Senate on December 20 and is expected to be signed by President Trump soon. Although the new law does not take effect until 2018, there are two primary steps you can take now, before the end of the year, to reduce your tax bill:
- Accelerate charitable donations into 2017, including charging donations to credit cards, which counts as a deduction on the day you charge it.
- Prepay your real estate taxes to get the deduction in 2017, as the ability to deduct these taxes will be greatly reduced starting next year. Beware that if the Alternative Minimum Tax (the “AMT”) applies to you, you will effectively lose the benefit of this deduction. Don’t know if you’re subject to AMT? Check last year’s tax return to see if there’s an amount on Line 45.
STEPS TO TAKE AFTER JANUARY 1:
- Look at how you are paying investment advisory fees. Beginning in 2018, you lose the ability to deduct these fees as an itemized deduction. This will make it more advantageous to pay fees for traditional IRAs out of the retirement accounts themselves – in doing so you will be using pre-tax money. For clients of THOR, we will be reviewing how fees are paid and contacting you individually about potential changes for 1st quarter fees paid in April. Since there is not adequate time to do this review prior to 4th quarter 2017 fees being paid in January, those fees will be paid as usual and adjustments made later, if necessary, to take fees out of the appropriate account.
- Consider using a donor advised fund to make a large deductible contribution that can be doled out to individual charities at a later date. Beginning in 2018, the standard deduction almost doubles which will make it harder for people to benefit from itemizing deductions. Creating a donor advised fund will enable you to bunch your charitable donations into a single year and alternate between itemizing and taking the standard deduction.
- The ability to undo a Roth conversion is going away in 2018. Be careful that you convert the correct amount – meaning you might want to wait until you have a clear picture of what your income will be before deciding on the amount. This might mean waiting until later in the year to do the conversion. We are uncertain at this point if this will impact the ability to undo a 2017 conversion in 2018 before you file your 2017 tax return.
• If you are a business owner, invest in your business! For the next five years, purchases of capital equipment and other short-lived tangible assets will be fully deductible in the year of purchase.