Year-End Tax Planning in Uncertain Times

Year-End Tax Planning in Uncertain Times

Perry A. Shulman, CPA

Elizabeth Forspan, Esq.

 

There is always a certain degree of guesswork that goes into year-end tax planning.  This year, with the uncertainty surrounding what the tax code will actually look like after Washington completes the overhaul of our tax system, the guesswork is, to borrow a word from our President, HUGE.  The income tax rates for many individuals and businesses may decrease.  However, the definition of income subject to tax may change considerably as well.  Many itemized deductions that we have become so used to, such as the deduction for qualified medical expenses, state and local income taxes, real estate taxes and miscellaneous itemized deductions may be eliminated.  However, if the resulting new rules resembles the proposals put forth by the President, there will be a doubling of the standard deduction and the possible elimination of the controversial Alternative Minimum Tax.  Below are some tax-planning suggestions, which consider both the typical year-end planning techniques as well as planning for a potential overhaul:

 

  • Consider deferring the recognition of income from a higher tax rate year to a lower tax rate year.
  • Business expenditures and equipment purchases made in a higher tax rate year may result in greater tax savings than if made in a lower tax rate year.
  • Maximize the 2017 funding of an IRA, SEP IRA, 401(k) plan, Profit Sharing plan or Defined Benefit Plan contribution, if your 2017 tax rate will be higher than your 2018 rate and before the maximum contribution amounts may be reduced. A “Qualified Plan” (Profit Sharing plans, 401(k) plans and Defined Benefit Plans) established by an employer to provide retirement benefits for its employees and their beneficiaries must be established by December 31 or the end of the business’ fiscal year, of the year in which the contributions are to be deducted.  SEP IRA’s must be established by the employer’s tax filing deadline including extensions.
  • Consider pre-paying state and local income tax liabilities for 2017 before year-end so long as you are not subject to the Alternative Minimum Tax, as this deduction may be eliminated for payments made in 2018. This prepayment may be accomplished through employer payroll or retirement plan distribution withholding or through estimated income tax payments.
  • Consider pre-paying real estate tax liabilities before year-end so long as you are not subject to the Alternative Minimum Tax, as this deduction may be eliminated for payments made in 2018. Many real estate tax bills for the first half of 2018 have already been distributed.
  • Consider paying current itemized deductions and other expenses with a credit card prior to December 31. The expense may be deductible on your 2017 return while you may delay making the payment to the card issuer until 2018.
  • The current proposals will not allow for itemized deductions in 2018 of unreimbursed medical expenses in excess of the 10% of Adjusted Gross Income (“AGI”) limitation. Taxpayers should consider scheduling elective medical, vision, dental, and acupuncture procedures in 2017, enroll in stop smoking programs, purchase prescription glasses, and pay for these items prior to year-end.  Once the 10% limitation is met, health care bills may be deductible.  The above-mentioned credit card payment rule applies here as well.
  • Survivors of Hurricanes Harvey, Irma or Maria may be entitled to special tax relief including less restrictive casualty loss rules and access to retirement funds. In addition, taxpayers may also want to settle insurance or damage claims this year in order to maximize the 2017 casualty loss deduction.  This type of itemized deduction may be unavailable in future years.
  • IRA owners over the age of 70 ½ can explore making their charitable contributions directly from their IRA accounts to designated charities. Subject to limitations, the distribution will qualify towards the taxpayer’s annual required minimum distribution but is not included in their Adjusted Gross Income.  The advantage of using this method is that a lower AGI will result in lower AGI related computations.
  • The reduction of “net investment income” (unearned income) through deferral from 2017 to 2018 may result in the decrease of the 2017 net investment income tax (potential savings of an additional 3.8% on certain income).
  • Contributing appreciated securities held for more than one year directly to a charity is more efficient than selling the security and contributing the proceeds. The advantage of using this method is that a lower AGI (that does not include recognition of the gain on the sale) will result in lower AGI related computations.  Taxpayers get to deduct the fair market value of the security when contributed, subject to annual AGI limitations.  Contributions made in excess of the limitations may be carried forward to subsequent years.
  • Gifts made to individuals before year-end that are sheltered by the annual exclusion (currently $14,000 per donee) are not subject to gift taxes and will reduce the value of an estate. Gifts can be given to an unlimited number of individuals, which can significantly help reduce the size of your taxable estate for both state and federal estate taxes.  The annual exemption amount for 2018 will be increased to $15,000 per individual.

 

Perry A. Shulman, CPA is the Managing Partner of his highly respected East Rockaway Long Island based tax consulting practice.  He advises high-net-worth individuals, business owners and entrepreneurs in various areas including income and estate and trust planning and administration.  Mr. Shulman addresses professional organizations and has been quoted in various national news and professional publications.  Perry may be contacted at p.shulman@pascpa.com.

Elizabeth Forspan, Esq. is the Managing Attorney of Ronald Fatoullah & Associates, a law firm that focuses on estate planning, elder care and Medicaid planning, guardianships, probate, estate litigation and taxation.  Elizabeth can be contacted at 1-877-ESTATES or eforspan@fatoullahlaw.com.

 

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5 Things I Wish I Told My Dad

In 2014 my father was diagnosed with Lewy Body Dementia which is the second most common type of dementia after Alzheimer’s disease. Little did my family know the difficult road that would lie ahead to provide my father with appropriate care as the disease continues to progress. As a financial advisor, I find comfort in being able to alleviate the stress my mother has of managing their finances through this difficult situation.

My father never liked to seek outside help with his personal finances, but five years ago, while he was still well enough to make his own decisions he brought me down to his office in the basement to go over his accounts in case his health were to diminish. At the time, I was a trader on Wall Street and knew very little about how a retiree should manage their finances. But if I knew what I now know, this is what I would have told him on that day:

  • For your family’s sake, consolidate. The binder my father used to keep track of his accounts was always up to date and accurate, but as I thumbed through the graph paper with numbers carefully penciled in, I noticed that as time went on the pages weren’t as detailed and the time between entries were further apart. I didn’t know it at the time, but this was one of the earliest signs of his cognitive issues. When his condition worsened and I took over managing the accounts, there were checking and savings accounts at several banks, CDs reinvesting at almost no interest, paper savings bonds stashed away with no copies stored online or in another physical location, and a portfolio which had very little direction. It comprised investments that were collected over the years that were never revisited to determine if they were still suitable. We have since consolidated these accounts, and come up with a portfolio that reflects their current needs. At any time, my mother has online access to a snapshot of her accounts where she can see everything in one place. This has given her great peace of mind.
  • Dust off those estate plans. It isn’t uncommon for a young family to establish their estate plans when they get married or have their first child and never revisit them again. This is a mistake. I cannot emphasize enough how important it is to have a durable power of attorney with clear direction. The power of attorney has been an important tool in managing my father’s finances. His will and health care proxy will take a lot of the difficult decisions away from our family. We are able to spend our time with him and focus on providing him with the best quality of life that we can, knowing what his wishes are.
  • Long term care isn’t cheap, so what’s the plan? The cost of long term care can easily dwarf the cost of attending a four year university. We spend years planning how we are going to pay for our children’s education, but very little time is spent on how we will manage the cost to maintain our quality of life in our later years. Long term care insurance isn’t always feasible, but if added to the picture, can be an extremely valuable tool. Some form of it should be considered sooner rather than later as policies become more cost prohibitive as one gets older. My father does not have a long term care policy, and it would have made the planning process easier.
  • Can anyone help pay the bills? In addition to long term care insurance, other options to subsidize the cost of long term care include Medicaid, VA Benefits, and certain supplemental insurance policies. These were all areas that we explored after my father was already sick and in the early days it took time away from getting him the proper help. Understand these programs and policies before you actually need them to see if they will be available to you. Even if you are eligible, the paperwork can be overwhelming and it is better to be prepared.
  • Work with the pros. Talking to your children about your finances and your wishes in case your health were to decline is a great first step, but have a team of professionals and their contact information available for your family members so they can step in and do the heavy lifting when needed. A financial planner can act as the quarterback for your family and work between you and the other professionals that you entrusted. I was fortunate to work with my family’s estate attorney and accountant to guide me through the planning process. A geriatric social worker or elder care consultant could also be a valuable resource.

Nobody wants to think about the possibility of losing their cognitive abilities, but establishing a plan will assist your loved ones in the event that they need to oversee your care.  Reacting to unfortunate events leads to worse outcomes than planning for their possibility. Take the initiative, and speak with a qualified professional to assist you with your plan.

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