Don’t wait for a tax reform to start your tax-planning strategy

  • Many are putting tax planning on hold until they see what Congress is going to do.
  • The most important tax-planning advice: File as early as possible to avoid tax-return identity theft.
  • There are several tacks you can take to reduce your tax burden, no matter what Congress decides to do, including putting charitable contributions into a donor-advised fund and moving traditional IRA savings into a Roth IRA.

There has been a great deal of discussion concerning tax reform these days, and many people are putting tax planning on hold until they see what Congress is actually going to do. Since that could take a lot of time and we don't know if any changes will actually occur, it makes more sense to plan now and adjust later if the world changes. Focus on what you know and what you can control, and don't worry about any changes until they actually occur.

Tetra Images | Getty Images

Don't wait until 1099s start arriving, to begin gathering your data for filing. The top priority and most important tax-planning advice is to file as early as possible to avoid tax-return identity theft. Have all backup data possible in early January so that when 1099s do arrive, you are ready to file.

One of the most important things you can do right now is to get a handle on a good, solid estimate of your current year's tax liability. Taxes must be paid as you earn or receive income during the year, either through withholding or estimated tax payments. Estimated tax payments are due the 15th of April, June, September and January.

If you don't pay enough withholding and estimated tax payments, you may be charged a penalty for underpayment of estimated tax. In order to avoid an underpayment, each quarter you must pay 25 percent of the following: 90 percent of the current year's tax liability, or 100 percent of the prior year's tax liability (110 percent if you are married and make more than $150,000 per year, or if you are single and make more than $75,000 per year).

If you find that you have not paid enough to avoid penalties in the first few quarters, you may want to increase withholdings from income, such as your salary or a pension. Withholding is considered paid evenly throughout the year, even if it's done later in the year, so it is a good tool to help reduce or avoid penalties.

More from Active/Passive:
Indexing still on top, but active management plays role
Why traditional investment strategies don't work
I am a lazy, cheap investor. Here's why.

After you have a handle on what your tax picture looks like right now, you can look at ways to potentially reduce taxes. There are various strategies that can be employed to either reduce or defer your taxes, and a few are discussed below.

Accelerating deductions/postponing income. If you believe that you will be in a lower tax bracket in 2018 than you were in 2017, these strategies may work for you. Some steps to take to accelerate deductions include making any anticipated 2018 charitable contributions in 2017 and prepaying your property and state income taxes. Although you can't deduct prepaid interest, you can pay your January mortgage payment in December, because the interest due in January is interest due on December's loan balance.

Another option would be to sell some investments that have created a capital loss. You can take a net loss of $3,000 each year against ordinary income, with any excess being carried over to future years. If you own a business that has excess cash on hand, consider whether there is a need for any large purchases (think equipment or vehicles) that you may be able to expense in the current year.

On the income side, if you have any control over when a bonus or other income will be paid, put it off until January. If you are a cash-based business owner, delay billing a customer until 2018. Seriously consider maximizing that 401(k) plan contribution. Starting now, instead of in December, gives you more time to spread those deductions over multiple pay periods.

This strategy not only takes advantage of reducing taxable income in a high-bracketed year but also could bring you below some income thresholds that limit itemized deductions, disallow certain credits or subject you to the Net Investment Income tax.

Accelerating income/postponing deductions. If your income in 2018 is expected to put you in a higher bracket, these strategies may work for you. One step to take to accelerate income is to take that bonus now (or before year-end). Or take any planned retirement distributions (if not subject to the 10 percent penalty). You could also sell some investments to take some of those profits or accumulated long-term capital gains.

Untitled Document

Sign Up for Our Newsletter Your Wealth

Weekly advice on managing your money
Get this delivered to your inbox, and more info about about our products and services.
By signing up for newsletters, you are agreeing to our Terms of Use and Privacy Policy.

On the deduction side, you can put off paying your state estimated tax payments until January (if allowed by your state) and think about delaying any large business-asset purchases that can be expensed immediately.

Here are some other strategies to consider:

• If you're 70½ or older, you can satisfy your minimum required distribution from retirement accounts by making a charitable contribution directly to the charity from your individual retirement account. The amount, then, is not included in your income. This strategy has the potential to affect how much of your Social Security is taxed and how much you will pay for Medicare parts B and D. This strategy also gets a double bang for your buck if your deductions aren't high enough to itemize! Make sure the charity sends an acknowledgement to you.

• If you have some spare dollars and are feeling charitably inclined, put some money in a donor-advised fund. You get the deduction in the current year but can disburse the funds in future years.

• If your income is too high to claim education credits for your children, you may have some opportunity in the last year of college. If your child lands that new job and provides more than half of his own support in the same year tuition is paid (for or by himself), he can be eligible for the $2,500 American Opportunity Tax Credit (and you can ask him or her to give it back). Some colleges require payment for the spring semester in December of the prior year. If you opt for a tuition payment plan, you should be able to pay some of that in the current year.

"One of the most important things you can do right now is to get a handle on a good, solid estimate of your current year's tax liability."

• If you are in a low tax bracket in a particular year, consider converting any traditional IRA to a Roth IRA. You will have to pay the tax on it now, but it will grow tax-free and you won't be taxed when you take distributions in retirement. It is also a great way to reduce those required minimum distributions. You can also change your mind up to a certain point later on and reverse the conversion.

• If you plan to gift money to an adult child who is in the 10 percent to 15 percent tax bracket, consider gifting him/her appreciated securities. When he/she sells, the capital-gains tax rate is zero percent. You can gift up to $14,000 in 2017 to any individual without gift-tax consequences. If married, your spouse can also gift that amount to the same person.

• Also, don't forget to use any money you have contributed to a flexible spending account. These accounts are "use it or lose it" accounts. Some employers have grace periods or the option to roll over $500 to the following year. Check with your employer.

• If you are paying education or medical costs for someone else, pay them directly to the educational institution or the medical provider. Direct payments are not counted toward your annual gift-tax exclusion.

• And when estimating your income in any given year, don't forget to consider whether you are subject to the alternative minimum tax — this can change everything.

— By Diahann Lassus, president and CIO of Lassus Wherley

Latest Special Reports

  • In a world of big box retail and e-commerce, successful business owners are taking new paths to Main Street success.

  • Cyber Security Concerns In The Global Wake of Hacking Threat

    Cyber Report features ongoing coverage of cyber threats, data breaches, and the the latest cybersecurity innovations from business and government working together to prevent hacking.

  • FA 100 square

    As the need for high-level financial advice grows, wealth managers handling high-net-worth clients grow more important.