4 Year-End Tax Tips as Overhaul Looms

Among the deductions that may not be around next year are those for medical and dental expenses (the House bill eliminates it; the Senate expands eligibility), alimony (nixed in the House bill), expenses for job hunting, home offices, tax preparation and professional dues.

3. Defer pass-through income.

Both the House and Senate bills lower the tax rate on pass-through entities so long as they are not from a professional service firm, like a law or accounting firm. If the proposed tax rates are lower than the rate the business currently pays — the rate is now set at the marginal income tax rate of the business’s owner — the client should defer 2017 income into 2018. For example, if the owner has a marginal tax rate of 39.6%, the current top marginal rate, he would save on taxes by deferring income into 2018. How much can be deferred given the late date is a question, but in either case there is money to be saved.

In general, the House bill lowers the top rate from 39.6% to 25% and phases in a 9% rate for businesses that earn less than $75,000, and the Senate bill lets pass-through entities deduct 23% of income from taxes. There are a lot more details in each provision about the taxation of pass-through income, so it bears watching to see exactly what is in the final bill.

Sole proprietors who don’t operate as pass-throughs may also want to consider deferring income into next year if they expect their tax bracket next year will be lower than it is this year. At this point, however, it’s unclear what their next year’s tax bracket will be. “That’s the maddening part of the whole exercise,” says Schlesinger. The House bill has four brackets — 12%, 25%, 35% and 39.6% — and the Senate tax bill has seven: 10%, 12%, 22%, 24%, 32%, 35%, and 38.5%. Both have a zero rate for those with incomes under $9,525 for singles and $19,050 for married couples filing jointly.

4. Consider selling shares of some stocks.

The Senate tax bill requires that investors sell their longest held shares before any others, which potentially upends the tax-loss harvesting strategies that most advisors use to minimize the tax consequences of asset sales. The first in, first out (FIFO) requirement eliminates the discretion to sell those assets that would minimize tax consequences. Investors could not sell only those shares of a particular stock that had the smallest gains or the biggest losses to offset other gains.

Note that the House bill doesn’t include this provision and the final Senate bill applies FIFO only to securities sales by individuals, not by mutual funds or ETFs, who were subject to FIFO rules in the initial version of the bill.

Schlesinger suggests that investors consider sales of assets before year end only if they already thinking of selling that stock, apart from any tax rule changes.

— Related on ThinkAdvisor:

• 4 Ways Senate Tax Bill Hurts Retirement Plans 
• How the House and Senate Tax Bills Would Raise College Costs
• House, Senate Tax Bills Will Not Help Economy: Moody’s