Practical approaches for individuals

At this point, it is still uncertain whether any significant tax reform will be enacted this year (and even if it will be applicable to this tax year or next). Keeping that in mind, individual taxpayers may stick with “tried-and-true” methods to reduce taxes owed at year-end. Here are seven prime examples:

  1. Harvest capital gains or losses. Typically, you might realize capital gains or losses from sales of securities that can offset each other at year-end. The maximum tax rate on net long-term capital gains is 15% (20% for those in the top 39.6% bracket). Conversely, capital losses can offset gains plus up to $3,000 of ordinary income in 2017. Note that other tax provisions, including the 3.8% surtax on net investment income (NII), may come into play.
  2. Donate to charitable causes. Generally, you can deduct the full amount of cash (or cash-equivalent) gifts made to qualified charitable organizations, as long as you keep the necessary records. Also, you may deduct the fair market value of gifts of appreciated property if certain requirements are met. However, special limits often apply, including a 3% reduction in deductions for certain high-income taxpayers.
  3. Account for the AMT. The alternative minimum tax (AMT) continues to trap millions of taxpayers each year. This “stealth tax” may apply if you have an overabundance of “tax preference items,” especially if you reside in a high-tax state. Have a review of your AMT liability conducted to determine if you should shift income items or deductions at year-end.
  4. Prepay state and local income taxes. Absent other circumstances, the conventional wisdom is to reduce your current income tax bill whenever possible. Therefore, you might arrange to prepay any state and local income taxes due by January 1, 2018, before the end of 2017. As a result, you can increase your deduction for state and local taxes in 2017.
  5. Secure dependency exemptions for children. Generally, you can claim a dependency exemption for children under age 19 or full-time students under age 24. However, you must provide more than half the child’s support to qualify. When necessary, increase support at year-end to ensure that you clear the half-support mark this year.
  6. Bunch up medical expenses. For all taxpayers, the current threshold for deducting medical expenses is 10% of adjusted gross income (AGI) for the year. (Prior to 2017, it was 7.5% of AGI for taxpayers age 65 or older.) Thus, it may be advantageous to move non-emergency medical expenses, such as dental cleanings and physical examinations, into this year. Try to move medical expenses into the tax year when they will do you the most tax good.
  7. Avoid RMD penalties. If you are older than age 70½, you must take annual required minimum distributions (RMDs) from your qualified plans and IRAs. The penalty for failing to take RMDs is equal to 50% of the required payment. Comply with the rules before it is too late.

Of course, this is only a general overview of year-end tax planning. Your personal situation may require a different approach. Schedule a meeting with your JMF professional advisers to discuss the alternatives.