As Tax Reform Looms, Consider These 7 Tax Moves Now

Congress is working quickly to get a tax bill to the president’s desk by Christmas. The proposed legislation would take effect January 1, 2018, and includes both permanent laws and laws that could sunset starting in 2025 (with the hope that a future Congress would make them permanent). While acting on proposed legislation is not recommended, preparing for it is.

The strategies we’ll discuss below are not specific recommendations but are rather meant to inform you of what might be applicable to your situation so that you are prepared to act once a final bill is signed into law. Make sure you consult with your tax advisor to determine if any of the following tax moves make are opportunities worth pursuing.

1. Prepay Your State Income Tax Liability
If you are not subject to the alternative minimum tax (AMT) and have consistent income, you could benefit from prepaying your state income taxes before the end of the yearIf you realized additional income during the year (e.g. capital gains, bonus, Roth conversion, etc.) that would cause you to anticipate a balance due in April, prepaying that state tax liability could be beneficial.

If your income will be significantly lower in 2018, you may also benefit from prepaying because you’ll get a deduction at a higher rate next year when your income is lower.

2. Accelerate Charitable Deductions
It is far more likely that people will not get a benefit for their charitable contributions going forward due to the doubling of the standard deduction and the reduction/elimination of your ability to deduct your state your state and local income/property taxes. Consequently, accelerating charitable deductions could be beneficial.

If that applies to you, it means any gifts you’re considering giving in 2018, you may want to give before the end of the year to obtain a financial benefit. Instead of just accelerating cash gifts, consider fulfilling your charitable intent by donating appreciated stock that you’ve owned for more than one year. Another donation to consider is cleaning out your closets or home and donating the clothing and household goods before the end of year to increase your charitable contribution. If you are someone who gives larger amounts of money every year, think about prefunding multiple years’ worth of gifts in a donor advised fund this year.

3. Accelerate Other Expenses This Year
If you have elective medical expenses you’re planning for, it may be best to pay them this year if possible. Prepaying your property taxes could also be beneficial, but you will need to be sure your county accepts prepayments (most do).

4. If You’re Not Subject to AMT, Defer Income
Because tax rates are likely to decrease and tax brackets expand, you may end up with a lower tax burden in 2018, so deferring income (bonus, first RMD, etc.) may allow you to take advantage of these tax changes.

5. If You Are Subject to AMT, Take Income This Year
For anyone in AMT, you’re likely to be subject to 35% tax next year under the House proposal (if enacted), so you may want to realize more of your income (bonus, first RMD, Roth conversions, etc.) this year at the current 28% rate.

6. Complete Any Roth Re-Characterizations
Both the House and Senate bills take away the option to do Roth re-characterizations, so if you plan to reverse a Roth IRA conversion, consider completing before the end of the year. Keep in mind that taking away this option will also mean that there is an increased risk associated with future Roth IRA conversions

7. Rebalance Your Taxable Portfolio
The Senate is considering changing the way your cost basis is used when you sell a security to first in, first out. That usually means your lowest, oldest cost basis is used when you sell positions. This means rebalancing your portfolio could be more expensive in 2018, so evaluating whether a rebalance is advantageous is recommended.

Now is the time to start thinking about the possibility of upcoming tax changes and how they may affect your personal financial situation. While the specifics are not yet set in stone, the House and Senate are aligning on the direction of tax reform.

By considering the proposed legislation’s potential impact on you and your finances, you can be better prepared to act once a law is passed. It’s more important now than ever to work with a tax planning professional before making any changes that could impact your financial situation.

This material is not a substitute for professional tax advice or services, nor should it be used as a basis for any decision or action that may affect your financial situation. Before making any decision or taking any action that may affect your situation, you should consult a qualified professional advisor.