What a fall! The fire has shaken most of us to the core, but time marches on. We are nearing year end, and the prospect of tax reform which will completely change our tax system looms large. However, there is very little in the way of specific changes at this point to consider in trying to reduce your tax burden. On top of that, the fire losses for many of you add several variables to the process of determining an effective tax saving strategy.
As a reminder, since President Trump declared this a federal disaster area, you have a choice whether to deduct your casualty losses on your 2016 1040 (the one just filed in the last 9 months) by amending the filing, or to claim the losses on your 2017 tax return. If you have significant losses, you should work with an experienced tax professional who is well versed in these rules.
Moving to the impending tax law changes, as I said before, we are lacking in specifics, but the generalities are clear. The new law will: 1. Reduce tax rates overall. 2. Reduce or eliminate certain popular tax deductions. 3. Eliminate the Alternative Minimum Tax. 4. (most likely) Reduce the deduction for contributions to 401(k) retirement plans. 5. Reduce or eliminate certain tax credits related to targeted investment. 6. Increase the Child Tax Credit.
So, in general, income you report will most likely be taxed at a lower tax rate in 2018 than if the same income was earned in 2017, and deductions, due to the relatively higher tax rate in 2017 vs. 2018, will result in a generally greater tax benefit if they are taken in 2017 vs. 2018. What that translates to, in general, that in 2017, more than any year in the last 30 years, deferring income and accelerating deductions will be a winning tax strategy. Your tax situation may not be the same. We advise that you speak with a competent tax advisor before adopting any tax planning strategy.
How do you accomplish the goals of accelerating deductions and deferring income? 1. Consider prepaying your state taxes. Pay your fourth quarter estimated tax before the end of 2017 to make it a 2017 deduction. 2. Consider paying both halves of your property tax in 2017. If you have your vehicle license renewal on hand before the end of December, consider paying that, too. Pay any deductible amounts for medical expenses, or items which would be miscellaneous itemized deductions before the end of the year as well. This could include paying your tax advisor for all of the good advice you are getting , and prepaying the fee to prepare your 2017 income tax return (and your amended 2016 tax return if you are choosing to take your casualty losses on an amended 2016 return. You may also want to consider accelerating charitable contributions. Even though that deduction does not appear to be subject to any discussion about limitation or elimination, the general tax rate difference expected between 2017 and 2018 means each 2017 deduction will be worth more in tax savings than a 2018 tax deduction.
Again, we recommend that you discuss these issues and planning ideas with your tax advisor. If you do not have one, we advise that you find one and consult with them as soon as possible.