The new tax bill – Tax Cuts and Jobs Act – is the most significant overhaul of the tax code within the last 30 years. With changes to tax rates, elimination of certain popular deductions and tax credits, virtually every American will be affected.
To take advantage of current law and allowable itemized deductions, there is still a narrow window of time to act. This article will detail what you can be doing now to alleviate the impact of changing regulations, and how you can take advantage of the lower tax rates which will be available next year.
Taking advantage of the new law
Tax Cuts and Jobs Act (H.R. 1) will reduce tax rates for many, which will be effective for 2018 tax filings. To take advantage of the lower tax rates, defer any possible income to 2018.
IRA to Roth IRA conversion
If you are thinking about converting your IRA to a Roth IRA, you should defer conversion until 2018 to take advantage of the lower tax rates; this way your conversion will be subject to a lower tax rate.
If you have already converted your IRA, then think about re-characterizing your conversion by making a trustee-to-trustee transfer, from Roth back to a regular IRA. This will effectively cancel out the original IRA-to-Roth conversion and allow you to reconvert in 2018. You must be quick, though; the recharacterization must be complete before year-end as recharacterizations like this won’t be allowed starting in 2018.
Postpone paying off creditors
When an individual makes a deal with a creditor to pay off or reduce their debt, the result is usually a rise in debt cancellation income, which is taxable. Therefore, to take advantage of the lower tax rates, anyone thinking about paying off debt should do so in 2018. Robinson & Henry, P.C. can help you handle any cancellation of indebtedness income that results from a creditor like your mortgage company agreeing to take less money then you owed.
Taking advantage of the current law
In exchange for a larger standard deduction in 2018, the new tax bill reduces and even suspends some popular tax deductions and credits. Under the new bill, individuals can only claim itemized deductions of up to $10,000 (or $5,000 for those married filing separately) for state and local property taxes and state and local income taxes. Here’s what you can do right now to maximize your tax savings.
Prepay your 2018 property taxes now
Even though Congress has disallowed prepayment of 2018 state income taxes, it will allow individuals to prepay property taxes before year-end (Dec. 31, 2017). Taxpayers will need to verify with local taxing authorities to make sure 2018 property tax assessments have been completed before paying.
Donate more to charity
Charitable contributions after 2017 may no longer be a tax benefit due to the doubling of the standard deduction, and taxpayer’s subsequent inability to itemize deductions. For those planning on claiming the standard deduction next year, they should consider giving more to charity before January 1, 2018.
Wrap up your divorce
Under the new law, alimony payments will no longer be tax deductible for the payor for divorce decrees entered after December 31, 2018. So, if you are likely to be paying alimony, it’s worth your while to wrap up your divorce in order to be grandfathered into current law and take advantage of the tax benefit.
This should not be considered legal advice. Some information contained herein is pertinent for many taxpayers; however, the advice of a tax professional should be consulted before acting. Our tax attorneys are available to examine individual cases. Please call 303-688-0944 to request a consultation.