Tax Planning Strategies, 2017 Year-End Tax Planning Series
A number of tax planning strategies should be considered with your year-end analysis. For instance, strategies involving the acceleration of expenses and/or the deferral of income can often provide an immediate cash tax benefit. Capital gains planning (including capital loss harvesting) and contributions to tax-deferred accounts, such as retirement savings and flexible spending accounts play a role in a successful year-end tax strategy. Testing your current tax posture for the Alternative Minimum Tax (“AMT”) liability should also be an integral part of every year-end review, especially when deciding when to pay any balance due on your state tax liability. Keep in mind that tax reform is very likely for the 2018 tax year, which may impact the advisability of some of these strategies. Some strategies include the following:
- Prepay January 2018 mortgage in December 2017 to maximize 2017 interest deduction. This will be particularly important if the 2018 mortgage deduction is limited.
- Defer recognition of gain on the sales of business and/or investment property through like-kind exchanges and installment sales. Note that like-kind exchanges may be limited to real estate beginning in 2018 under the House’s tax proposal.
- Use the $14,000 per donee annual gift tax exclusion (Spouses together can gift up to $28,000 per donee) by timing gifts, including front-loading gifts for a qualified college tuition program.
- Cash basis taxpayers can accelerate payment of employee bonuses by year-end to reduce their taxable income. Accrual basis taxpayers can generally defer the payment of non-owner employee bonuses until the fifteenth day of the third month following the taxable year of the accrual.
- Cash basis taxpayers can delay billing to curb revenue received (taxable) before the end of the year.
- Evaluate outstanding receivables and notes for collectability and potential full or partial write-off.
- Analyze “at-risk” and general tax basis in business entities to ensure the proper tax impact from pass-thru income, losses, credits, and distributions.
- Evaluate the long-term cost-benefit of C-Corp vs. S-Corp vs. LLC structure in light the differing rates applicable to individuals, corporations and pass-thru entities. Note that business income earned through pass-through entities may be subject to a lower tax rate in 2018 and future years.
- Review inventory to identify subnormal goods that may be offered for sale below carrying cost. Even if not sold by year-end, the difference between the reduced sales price and the carrying cost may be written off for income tax purposes.
- Pay expenses by credit card to claim deductions without using immediate cash (and earn reward points).
- Analyze passive activities to determine if “active” status can be achieved, and evaluate elections to “group” certain activities for purposes of determining net gains and losses from active and passive activities.
- Evaluate whether tax nexus in a new state or local tax jurisdictions has been established.
- Time charitable contributions, including donations of appreciated securities. Remember to retain important tax acknowledgment letters and secure appraisals if necessary to substantiate deduction. ALERT: It is likely that tax reform legislation will eliminate the deduction for a charitable contribution to a university in connection with the right to purchase seats at athletic events. Consider making the contribution before December 31, 2017, to benefit from the 80% charitable deduction currently allowed.
- Consider the establishment of an IC-DISC to reduce the tax on export income.
- Consider funding a Health Savings Account if you meet the eligibility requirements.
- Establish a pension or profit sharing retirement plan for your business by year-end, although funding can occur after year-end.
- Establish a Roth IRA. High net worth taxpayers can benefit from the informally-named “Backdoor Roth IRA” contribution, even if their income exceeds the Roth IRA AGI limitation.
Note that taxpayers in AMT for 2017 may need to modify certain of the aforementioned strategies. Furthermore, if tax legislation passes for the 2018 tax year, all of the aforementioned strategies need to be analyzed to determine whether accelerating income and/or deferring deductions may instead be more beneficial.