Grant Thornton offers 10 year-end tax-planning tips in an uncertain tax environment

As 2017 nears its end, an uncertain tax and legislative environment means that year-end tax planning could be more important than usual. The possibility of major tax reform getting passed in Congress “opens up powerful planning opportunities” for tax savings if completed before year-end, according to Grant Thornton LLP. 

The firm is the U.S. unit of Grant Thornton International Ltd, a global independent audit, tax, and advisory firm with revenue of more than $1.7 billion and 60 offices. It has an upstate New York office in Albany.

“The potential for tax reform makes year-end tax planning more important than ever for individuals and public and private companies,” Dustin Stamper, director in Grant Thornton’s Washington, D.C. national tax office, said in an Oct. 31 news release. “Tax filers should look for ways to accelerate deductions into 2017 while rates are high, and defer income into future years when rates might be lower.”

Stamper noted that the potential to lose deductions or tax incentives as part of tax reform should also factor into year-end planning. “It’s important to remember that good tax planning goes beyond what has happened. You also have to account for what may happen in the months to come,” he said.

Grant Thornton offered the following 10 key 2017 tax-planning tips for individuals:

1. Accelerate deductions and defer income. Deferring tax is usually a good strategy because of the time value of money. This year, it’s even more important, Grant Thornton says. “You want to use deductions now while rates are higher and defer income into future years when rates might be lower.” The firm recommends considering deferring bonuses, consulting income, or self-employment income. On the deduction side, accelerating state and local income taxes, interest payments, and real-estate taxes are possible moves to consider.

2. Use itemized deductions before they’re gone. Tax reform threatens many itemized deductions, including the deductions for state and local taxes and medical expenses, the firm said. If possible, individuals should consider paying expenses now while they can still use the deduction. “You can often prepay 2017 state taxes even if they aren’t due until next year.” Taxpayers can also often control the timing of expensive non-urgent medical procedures. However, some expenses cannot be deducted unless they exceed a certain percentage of one’s adjusted gross income (AGI). Medical expenses generally can’t be deducted unless they exceed 10 percent of AGI (7.5 percent for taxpayers age 65 and older), according to Grant Thornton.

3. Leverage the state and local sales-tax deduction. Individuals deducting state and local taxes can elect to deduct state and local sales taxes instead of state income taxes. This is “valuable” for people in a state without an income tax, but can also provide a larger deduction in other states if individuals made big purchases subject to sales tax (such as a car, boat, or home). The IRS has a table allowing people to claim a standard sales tax deduction so they don’t have to save all their receipts during the year. This table is based on one’s income, family size, and the local sales tax rate, and the individual can add the tax from large purchases on top of the standard amount. “If you already know you will make this election for 2017, consider making any planned large purchases before the end of the year in case the election is unavailable or doesn’t make sense next year,” Grant Thornton said.

4. Consider charitable deductions now. The charitable deduction deserves “special consideration because you have complete control over its timing.” Lawmakers have promised to keep it as part of tax reform, but they could still apply limits. Even if it is left untouched, it might not be valuable in 2018 for many taxpayers. Lawmakers are proposing to double the standard deduction, meaning fewer taxpayers will itemize deductions in the future. People who don’t itemize deductions cannot deduct charitable gifts. Individuals should consider moving gifts up into this year, because the deduction may be more valuable against today’s higher tax rates. However, AGI limits apply to deductions.

5. Get your charitable house in order. Those who do plan on giving to charity before the end of the year should remember that a cash contribution must be documented to be deductible. Those claiming a charitable deduction of more than $500 in donated property must attach Form 8283. “If you are claiming a deduction of $250 or more for a car donation, you will need a contemporaneous written acknowledgement from the charity that includes a description of the car. Remember, you cannot deduct donations to individuals, social clubs, political groups or foreign organizations,” according to Grant Thornton.

6. Make up a tax shortfall with increased withholding. Taxes are due throughout the year. People should check their withholding and estimated tax payments now while they have time to fix a problem. Those in danger of an underpayment penalty can try to make up the shortfall by increasing withholding on their salary or bonuses. “A bigger estimated tax payment can leave you exposed to penalties for previous quarters, while withholding is considered to have been paid ratably throughout the year,” the firm said.

7. Leverage retirement account tax savings. It’s not too late to boost contributions to a retirement account. Traditional retirement accounts such as a 401(k) or individual retirement account (IRA) still offer “some of the best tax savings.” “Contributions reduce taxable income at the time that you make them, and you don’t pay taxes until you take the money out at retirement.” The 2017 contribution limits are $18,000 for a 401(k) and $5,500 for an IRA (not including catch-up contributions for those age 50 and older).

8. Document your business activities. People may not need to pay a 3.8 percent Medicare tax on their business income if they participate enough in their business so that they are not considered a “passive investor.” Participation is defined as any work performed in a business as an owner, manager, or employee as long as it is not an investor activity. Still, they must document their activities, and the IRS will not let people make ballpark estimates after the fact. “Make sure you document the hours you’re spending with calendar and appointment books, emails and narrative summaries,” Grant Thornton said.

9. Take a closer look at your state residency status. For individuals who split their time in two different states throughout the year, “now is an excellent time to consider where you may be taxed as a resident for 2017.” To make it more likely that the high-tax jurisdiction will acknowledge the move and not continue to tax you as a resident, you should track the number of days you are spending in each jurisdiction. Generally, if an individual resides in a state for 183 days or more, that state will assert residency and the ability to tax all of the person’s income. “Furthermore, if you move to a new state but you maintain significant contacts with the old state (including driver’s license, residences, bank accounts, and the like), you could run the risk of being taxed as a resident in the old state,” the firm noted.

10. Tread carefully with estate planning. Normally, individuals want to make sure they don’t waste their annual $14,000 gift exclusion. This involves making gifts to heirs before the year ends. The possibility of estate tax repeal makes planning a little more “complicated” this year, Grant Thornton says. “It still makes sense to use your exclusion amounts because the estate tax may not be repealed after all and there is no tax cost to using the exclusion even if it is. But you may want to avoid using giving strategies that actually involve paying gift tax until after the legislative outlook is resolved.”

As 2017 nears its end, an uncertain tax and legislative environment means that year-end tax planning could be more important than usual. The possibility of major tax reform getting passed in Congress “opens up powerful planning opportunities” for tax savings if completed before year-end, according to Grant Thornton LLP. 

The firm is the U.S. unit of Grant Thornton International Ltd, a global independent audit, tax, and advisory firm with revenue of more than $1.7 billion and 60 offices. It has an upstate New York office in Albany.

“The potential for tax reform makes year-end tax planning more important than ever for individuals and public and private companies,” Dustin Stamper, director in Grant Thornton’s Washington, D.C. national tax office, said in an Oct. 31 news release. “Tax filers should look for ways to accelerate deductions into 2017 while rates are high, and defer income into future years when rates might be lower.”

Stamper noted that the potential to lose deductions or tax incentives as part of tax reform should also factor into year-end planning. “It’s important to remember that good tax planning goes beyond what has happened. You also have to account for what may happen in the months to come,” he said.

Grant Thornton offered the following 10 key 2017 tax-planning tips for individuals:

1. Accelerate deductions and defer income. Deferring tax is usually a good strategy because of the time value of money. This year, it’s even more important, Grant Thornton says. “You want to use deductions now while rates are higher and defer income into future years when rates might be lower.” The firm recommends considering deferring bonuses, consulting income, or self-employment income. On the deduction side, accelerating state and local income taxes, interest payments, and real-estate taxes are possible moves to consider.

2. Use itemized deductions before they’re gone. Tax reform threatens many itemized deductions, including the deductions for state and local taxes and medical expenses, the firm said. If possible, individuals should consider paying expenses now while they can still use the deduction. “You can often prepay 2017 state taxes even if they aren’t due until next year.” Taxpayers can also often control the timing of expensive non-urgent medical procedures. However, some expenses cannot be deducted unless they exceed a certain percentage of one’s adjusted gross income (AGI). Medical expenses generally can’t be deducted unless they exceed 10 percent of AGI (7.5 percent for taxpayers age 65 and older), according to Grant Thornton.

3. Leverage the state and local sales-tax deduction. Individuals deducting state and local taxes can elect to deduct state and local sales taxes instead of state income taxes. This is “valuable” for people in a state without an income tax, but can also provide a larger deduction in other states if individuals made big purchases subject to sales tax (such as a car, boat, or home). The IRS has a table allowing people to claim a standard sales tax deduction so they don’t have to save all their receipts during the year. This table is based on one’s income, family size, and the local sales tax rate, and the individual can add the tax from large purchases on top of the standard amount. “If you already know you will make this election for 2017, consider making any planned large purchases before the end of the year in case the election is unavailable or doesn’t make sense next year,” Grant Thornton said.

4. Consider charitable deductions now. The charitable deduction deserves “special consideration because you have complete control over its timing.” Lawmakers have promised to keep it as part of tax reform, but they could still apply limits. Even if it is left untouched, it might not be valuable in 2018 for many taxpayers. Lawmakers are proposing to double the standard deduction, meaning fewer taxpayers will itemize deductions in the future. People who don’t itemize deductions cannot deduct charitable gifts. Individuals should consider moving gifts up into this year, because the deduction may be more valuable against today’s higher tax rates. However, AGI limits apply to deductions.

5. Get your charitable house in order. Those who do plan on giving to charity before the end of the year should remember that a cash contribution must be documented to be deductible. Those claiming a charitable deduction of more than $500 in donated property must attach Form 8283. “If you are claiming a deduction of $250 or more for a car donation, you will need a contemporaneous written acknowledgement from the charity that includes a description of the car. Remember, you cannot deduct donations to individuals, social clubs, political groups or foreign organizations,” according to Grant Thornton.

6. Make up a tax shortfall with increased withholding. Taxes are due throughout the year. People should check their withholding and estimated tax payments now while they have time to fix a problem. Those in danger of an underpayment penalty can try to make up the shortfall by increasing withholding on their salary or bonuses. “A bigger estimated tax payment can leave you exposed to penalties for previous quarters, while withholding is considered to have been paid ratably throughout the year,” the firm said.

7. Leverage retirement account tax savings. It’s not too late to boost contributions to a retirement account. Traditional retirement accounts such as a 401(k) or individual retirement account (IRA) still offer “some of the best tax savings.” “Contributions reduce taxable income at the time that you make them, and you don’t pay taxes until you take the money out at retirement.” The 2017 contribution limits are $18,000 for a 401(k) and $5,500 for an IRA (not including catch-up contributions for those age 50 and older).

8. Document your business activities. People may not need to pay a 3.8 percent Medicare tax on their business income if they participate enough in their business so that they are not considered a “passive investor.” Participation is defined as any work performed in a business as an owner, manager, or employee as long as it is not an investor activity. Still, they must document their activities, and the IRS will not let people make ballpark estimates after the fact. “Make sure you document the hours you’re spending with calendar and appointment books, emails and narrative summaries,” Grant Thornton said.

9. Take a closer look at your state residency status. For individuals who split their time in two different states throughout the year, “now is an excellent time to consider where you may be taxed as a resident for 2017.” To make it more likely that the high-tax jurisdiction will acknowledge the move and not continue to tax you as a resident, you should track the number of days you are spending in each jurisdiction. Generally, if an individual resides in a state for 183 days or more, that state will assert residency and the ability to tax all of the person’s income. “Furthermore, if you move to a new state but you maintain significant contacts with the old state (including driver’s license, residences, bank accounts, and the like), you could run the risk of being taxed as a resident in the old state,” the firm noted.

10. Tread carefully with estate planning. Normally, individuals want to make sure they don’t waste their annual $14,000 gift exclusion. This involves making gifts to heirs before the year ends. The possibility of estate tax repeal makes planning a little more “complicated” this year, Grant Thornton says. “It still makes sense to use your exclusion amounts because the estate tax may not be repealed after all and there is no tax cost to using the exclusion even if it is. But you may want to avoid using giving strategies that actually involve paying gift tax until after the legislative outlook is resolved.”