Could there be more of a snoozer than discussing tax code while you still have eggnog in your cup? I wish this column could be devoted to something deeper and more enduring, but time is very short and you may have the ability to fill your own stocking with a tax refund in the waning days of 2017.
The new tax law passed both the House and Senate last week, and should take effect for 2018 pending the President’s signature. For many it makes sense to act now to reap the benefits of our current tax structure. I want this to be impactful on your personal tax situation, so have your 2016 tax forms available to see if these recommendations apply to you.
The first step is to determine if you itemized your deductions for 2016? You can confirm this if you filed Schedule A as part of your 1040. About 30 percent of taxpayers itemize their deductions, and the proportion in Boulder County is certainly higher than this. If you itemized in 2016, the same is likely true for 2017. All of the tax tweaks discussed in this column are for those who have been itemizing deductions.
Why are itemized deductions so valuable for 2017? Next year the standard deduction will go up to $12,000 for single filers and $24,000 those filing jointly. When computing your taxes, you subtract from your income either the standard deduction or itemized deduction, whichever is higher. There are many itemized deductions going away for 2018, and tax rates will be lower for most. So many taxpayers who itemize for 2017 will not be doing so for 2018, and should take the deductions now while they can.
Prepay your January mortgage payment. With tax rates going down next year and many more taxpayers using the standard deduction, most should pay their January mortgage payment a few days early to deduct that interest in 2017.
Concentrate charitable deductions. Next year substantially fewer taxpayers will deduct charitable donations. Make your cash donations and Goodwill runs by the end of this year. I have recommended charitable donor advised funds for years, which allow you to make a big contribution to your own personal charitable fund, take the tax deduction immediately, and then direct the fund to make donations to your favorite qualified charities on your own timeline. Schwab and Fidelity both have good charitable funds, as do local community foundations.
If you have the cash or investments to do it, open up a donor advised fund by the end of the year and contribute now at least as much as you would give to charity over the next few years. This allows you to support charities on a regular basis and lower your taxes now.
Prepaying property and income tax. A maximum of $10,000 for married filers can be deducted for state income and property tax starting next year. Even though Colorado has relatively low property and income taxes, if you were above $10,000 in 2016 (look at line 9 on Schedule A) then it’s likely your deduction will be limited for 2018. Boulder County and other Colorado counties are prepared to accept your next year’s property tax bill today. Call the County Assessor office to get an estimate of how much you will owe in 2018. Send in that check before year end to get the federal income tax deduction for 2018. This step becomes more complicated If your mortgage company pays your property tax payments.
Plus, if you pay estimated income taxes, you should pay your final state estimated tax payment by the end of the year instead of January 15th, again so it can be deducted. Please note that you cannot deduct your 2018 state income taxes if you prepay them now as the new tax legislation specifically forbids it.
One important caveat with prepaying all taxes: if you’re expected to pay Alternative Minimum Tax (AMT) for 2017, it doesn’t help to prepay property tax or state estimated income tax. You can confirm you paid AMT in 2016 by seeing if there’s a number on line 45 on page 2 of Form 1040.
For the right taxpayers, the techniques above could save you thousands on your 2017 tax return. As we get into next year, we will cover other strategies that make sense after tax reform.