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Financial Planning > Tax Planning

4 Last-Minute Tax Strategies for Clients in High-Tax States

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Time is running out for advisor clients who are facing tax increases next year as a result of the tax bill that Congress has just passed. 
Although the bill cuts federal income taxes for many taxpayers, advisor clients who live in high-tax states such as California, New York and New Jersey could ultimately pay more in taxes or receive only a slight benefit because they will no longer be able to deduct more than a total of $10,000 in state and local income taxes and property taxes or take advantage of other disappearing deductions. That change is expected to put downward pressure on home prices in some of those markets. Many taxpayers may also choose to stop itemizing deductions and take a standard deduction, which is doubled under the tax legislation, instead.
“Tell clients to keep calm,” says Megan Gorman, a founding partner of Chequers Financial Management in San Francisco. There are strategies to help minimize taxes for next year, but clients need to be aware that there is no one-size-fits-all solution and that one move designed to minimize taxes could unintentionally increase a taxpayer’s tax liability. “People need to talk to their CPA,” says Gorman.
Here are some year-end tax strategies that clients facing higher taxes next year should consider, courtesy of Gorman:
Prepay local property taxes.
1. Prepay local property taxes. Under the final version of the tax bill, taxpayers cannnot prepay state and local income taxes but they can prepay local property taxes. If those taxes alone will exceed $10,000 or in combination with state and local income taxes will top $10,000 next year, advisor clients should consider paying some or all of those property taxes before year-end. 
First, however, they need to check that they won’t be subject to the Alternative Minimum Tax next year — which is why they need to call their accountant — because those prepayments are considered a preference item for purposes of the AMT. They also need to consider whether they can afford to make the prepayment. “Never let a tax deduction drive you to cash-poor,” advises Gorman.
Taxpayers should check with their local tax authority to see if there is a limit on how much of their property taxes they can prepay.
Maximize charitable donations. 
2. Maximize charitable donations. There are many reasons clients may want to increase donations to charities this year. Since marginal tax rates are higher this year then next, the tax deduction for charitable donations for those who continue to itemize will be worth less next year.
Those clients who don’t expect to itemize next year because of the new tax regime can front-load their donations this year to maximize their charitable donation deduction. They can also donate appreciated securities to swell contributions and deductions this year since they likely don’t have a lot of losses to offset gains in their stock holdings given this year’s strong rally and gains in the previous eight years.
Gorman suggests that clients consider setting up a donor-advised charitable account this year for donations if they don’t already have one.
  Prepay a charitable gift that will disappear.
3. Prepay a charitable gift that will disappear. Under current law, taxpayers can deduct 80% of the price they pay for the right to purchase tickets for college sports events. The payment is considered a charitable donation to a school’s athletic department. That deduction goes away next year as a result of the new tax legislation, so clients who are die-hard fans of a college sports team should check with the school about prepaying for the 2018 season.
Defer income into next year.  
4. Defer income into next year. Since marginal tax rates will be declining next year, clients who can defer income into 2018 should do so. Some, especially corporate executives, may already be enrolled in a tax-deferred compensation plan, but others may be able to take advantage of that basic strategy if it’s available to them.
Instead of rushing into making any of these adjustments, clients can also just pause and see what happens next, says Gorman. “Creativity will occur along with new rules and new opportunities, and tax planners will think of new ways to work with the new code.”
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