Advisors have just a few weeks to counsel clients on how to get ahead of tax changes that are expected to take effect in 2018. There is no final tax bill yet, only a House version and a Senate version, but there are many overlapping provisions that are likely to end up in a final bill, including the elimination of many deductions, and chances are good that Congress will pass a bill this year to take effect next year.
Here are a few strategies that advisors should consider for clients, while closely watching developments in Washington, most of them courtesy of Jill Schlesinger, senior CFP Board ambassador:
1. Prepay local property taxes.
The House and Senate tax bills both limit the deduction of local property taxes to $10,000 from federal income taxes. If your client’s property taxes exceed $10,000, she can pay them this year instead of next and claim that deduction on her 2017 tax return. The client may want to contact her local tax department to check on how many quarters of tax payments she can prepay.
Another thing to check: whether making a prepayment, which is considered a preference item for calculation of the Alternative Minimum Tax, will subject your client to the AMT. If the client was subject to the AMT the previous year and her circumstances haven’t changed, there’s a good chance she will pay it this year, so the benefit to prepaying local property taxes will be limited or nonexistent. Your client may want to consult an accountant about this. Also keep in mind that the AMT is likely to change. The House bill eliminates it; the Senate keeps it but raises the threshold for income subject to the tax.
(Related: Tax Cut Bill Could Wallop Muni Bond Market)
Clients may also want to prepay state and local income taxes because those deductions, too, are eliminated in the House and Senate bills, but that may be complicated, says Schlesinger. Taxpayers should contact their state and local tax collectors to see how it can be done effectively. Also note that there is talk in Washington that the final tax bill could include a partial deduction for local income taxes for taxpayers in high-tax states like California.
2. Take as many deductions as you can.
About one-third of U.S. taxpayers currently itemize their deductions, but many deductions are on the chopping block. Here again the House and Senate bills differ, so it’s not clear yet which ones will be eliminated, changed or maintained. What is likely to happen, however, is a decline in the number of taxpayers who itemize deductions after the current tax year. More taxpayers will instead take the standard deduction, which is essentially doubled in both the House and Senate bills (though the personal exemptions are eliminated). Those taxpayers should take as many deductions possible this year.