Updated December 27 to reflect new guidance from the Internal Revenue Service on prepayment of real estate taxes.
Whether the tax overhaul helps you or hurts you, a handful of deductions are there for the taking between now and the end of the year. These are breaks you may never be able to use again. Some are about to be capped or eliminated. Others will become irrelevant as you join the growing ranks of people who take a standard deduction, rather than itemize.
Accelerating deductions has long been a popular year-end tax strategy. But there’s special urgency this year. The reason involves the movable parts on Schedule A of the tax return — the place where you list itemized deductions.
The perennial question, in anticipation of tax time, has been whether you had enough deductions to file this form, rather than simply take the standard deduction, (this year it’s $6,350 for single people and $12,700 for married couples filing jointly). What got many people over the threshold was being able to deduct real estate taxes, along with state and local income taxes. When filing a Schedule A to list these deductions, they could add a bunch of others, such as the deduction for charitable donations.
Starting in 2018, you’ll have a lot less leeway using deductions to reduce the amount of income that’s subject to tax. One reason is that the tax overhaul sets a $10,000 cap on the total deduction for real estate taxes; state and local income taxes; and sales tax. The other is that it roughly doubles the standard deduction, raising it to $12,000 for individuals and $24,000 for married couples filing jointly.
The net result is that fewer people will have enough deductions to itemize. And in the process they will lose all the (generally smaller) tax deductions that they previously itemized along with the categories of write-offs now subject to the $10,000 cap. Other deductions, eliminated by the tax law, will also go by the wayside.
Before that happens, it makes sense to tally up all the deductions that you can legitimately take in 2017. Doing so won’t limit your ability to claim the full standard deduction in 2018. But meantime you can reap additional savings on your 2017 taxes.
What’s a deduction worth? Its approximate value to you, in pocket, is the amount you are deducting, multiplied by the tax rate that applies to you in a given year. That’s true whether you take the standard deduction or itemize. And with tax rates slightly higher this year than they will be in 2018, each deduction saves you that much more.
What’s the catch? Money and deadlines! To take a deduction on your 2017 tax return, you must pay for the deductible item between now and December 31. If you can afford to do that, here are strategies you might want to consider.
1Pay medical – and dental – bills. Last year unreimbursed expenses (for yourself, your spouse and your dependents) were deductible if they exceeded 10 percent of adjusted gross income (7.5 percent if at least one spouse was older than 65). The tax overhaul lowers the floor to 7.5 percent for everyone for the 2017 and 2018 tax years. But of course you need to itemize for it to do you any good.
If you assume that you won’t be itemizing next year, here are some examples of steps to take before you turn the page to 2018: Pay any outstanding bills; schedule last-minute appointments and pay at the time of service; fill prescriptions; and bite the bullet on costly expenses you’ve been postponing, such as laser eye surgery, a hearing aid or orthodontia.
You can’t deduct expenses that you’re paying for out of a health savings account, since these are considered pretax dollars, but you can, in many situations, prepay 2018 health- and dental-insurance premiums and deduct them in 2017. To be sure your prepayments are properly credited, call your insurance carrier and ask about the proper protocol. For more information, refer to IRS Publication 502, which downloads here as a PDF.
Note: When you submit a check, bills are considered paid by the postmark date if sent by U.S. mail. If you use a credit card, it counts once the charge is posted, even if you have not yet paid your credit card bill.
2Prepay 2018 real estate taxes. How much of next year’s real estate taxes can be prepaid will depend on what your community allows. For example, if you live in a jurisdiction where the fiscal year ends on June 30, you may be able to prepay your real estate taxes for only the first two quarters of 2018. To address that issue, New York Governor Andrew Cuomo issued an executive order December 22 authorizing local tax collectors to immediately send out tax bills for 2018, and temporarily suspending local rules that restrict prepayments. In some cases it may enable state residents to prepay their real estate taxes for all of next year, rather than just part of it.
Update: In IR-2017-210, an advisory issued on December 27, the Internal Revenue Service clearly indicated that property taxes prepaid in 2017 may not be deducted for that tax year unless they were assessed before 2018. “State or local law determines whether and when a property tax is assessed, which is generally when the taxpayer becomes liable for the property tax imposed,” the Service noted. By way of example, if a county that assesses and bills its residents for property taxes on July 1 revises its computer systems to accept prepayment of property taxes for the 2018-2019 year, residents who make those prepayments can’t deduct them in 2017.
3Pay what you owe for state and local income taxes. The tax overhaul makes it clear that you can’t deduct 2018 state and local income taxes that you prepay this year. However, it behooves you to pay all the state and local taxes you owe for 2017 by December 31, even though your fourth-quarter payment (if you pay estimated tax) is not due until January 16. If, instead, you wait until next year, it counts as a payment in 2018 and can no longer be deducted on your 2017 return.
4Make charitable donations. Publicly traded appreciated securities are by far the most tax-efficient asset to donate to charity. You can deduct their full fair market value at the time of your gift (offsetting up to 30% of your adjusted gross income this year), yet you don’t have to recognize the appreciation as income.
If you want a 2017 deduction but don’t yet have a charitable recipient in mind, transfer those securities to a donor-advised fund. You can claim your deduction now, then recommend which of your favorite causes should receive grants from the account later. Organizations sponsoring donor-advised funds include religious entities, universities and community foundations. Some large financial institutions (including Fidelity, Vanguard and Schwab) have started donor-advised funds that are public charities.
To count as a deduction in 2017, your gift must be complete in the eyes of the Internal Revenue Service by December 31. For cash gifts, the same rules apply here as for No. 2, above. Gifts of stocks are complete when you have relinquished control over the asset and the broker has transferred control to the charity.
5Bunch up job expenses and miscellaneous deductions. This category, which covered a wide variety of expenses that could be deducted if they totaled more than 2 percent of your adjusted gross income, has been eliminated. So this is the last year to claim these deductions. For employees, examples include unreimbursed job travel, training, union dues and uniforms. (If you’re a freelancer or are self-employed, you can continue to deduct these and other business expenses on your corporate tax return, or your Schedule C, if you are a sole-proprietor.)
This is also the category where you can lump together many different expenses associated with your investments – everything from fees charged by lawyers, accountants and financial advisers, to hobby expenses, up to the amount of income they produce. See IRS Publication 529, which downloads here as a PDF.
Deborah L. Jacobs, a lawyer and journalist, is the author of Four Seasons in a Day: Travel, Transitions and Letting Go of the Place We Call Home and Estate Planning Smarts: A Practical, User-Friendly, Action-Oriented Guide. Follow her on Twitter at @djworking and join her on Facebook here. You can subscribe to future blog posts by using the sign-up box on her website’s homepage.