Planning Tip—Postponing income until 2018 and accelerating deductions into 2017 to lower your 2017 tax bill has always been a tried and true philosophy. This strategy is especially valuable where taxpayers will face slimmed-down deductions in 2018, and may be forced into the standard deduction for 2018. This strategy could enable you to claim larger deductions, credits, and other tax breaks for 2017 as your lower income, as a result of accelerating deductions, may allow you to claim larger portions of these tax breaks than you could without deferring income, since many of these breaks are phased out as AGI increases.

Beware of the Secret Tax

As counterintuitive as it may seem, the first step in individual income tax planning for the regular income tax is assessing your exposure to the AMT. As noted previously, a strategy that is effective for regular tax purposes can create an AMT liability because of the differences in the way certain deductions and income exclusions are handled. Consequently, it is crucial that you understand your AMT position in order to properly assess your tax planning options. AMT was a subject of hot debate in Congress as it was eliminated in both the original Senate and House proposals of the new Act, but was featured in the bill that became law.

As we have indicated in the past, individuals actually compute their income tax liability under two systems—the regular tax system and the AMT system—and pay the higher of the two amounts. Although the AMT was originally intended only to apply to taxpayers who claimed certain (or excessive) tax breaks, it has evolved into a system that affects many unsuspecting taxpayers.

Many taxpayers can unwittingly fall into the AMT. Taxpayers especially vulnerable to the AMT are those who exercise incentive stock options during the year, recognize substantial long-term capital gains, deduct significant amounts of miscellaneous itemized deductions (for example, unreimbursed employee business expenses or investment advisory fees), or pay large real estate taxes (such as residents of Illinois, New Jersey and New York) and state and local income taxes (such as residents of California, Montana, New York, Oregon and Vermont).

If you have determined that you will be subject to the AMT, you should try to control the timing of items that give rise to the AMT. Since the AMT rate (up to 28 percent) is generally lower than the effective maximum regular tax rate (39.6 percent in 2017, 37 percent in 2018), it may be to your advantage to take steps to accelerate income into 2017 if you will otherwise be subject to the AMT this year and expect to be in the 32 percent or higher tax bracket next year. At the same time, since many itemized deductions are generally added back to taxable income to arrive at alternative minimum taxable income (AMTI), they produce little or no tax savings in the year you are subject to the AMT. Therefore, you should defer such deductions until 2018 (if 2018 is a non AMT year). However, since many of the AMT “add-backs” are reduced or eliminated under the new Act, you may not be able to defer these deductions into 2018 and realize any benefit. Since investment interest and charitable contributions are deductible for both regular tax and AMT purposes, you should still consider accelerating these deductions into 2017, to the extent possible.

Planning Tip—Perform a multiyear analysis to measure the effect of various planning techniques that may be used in 2017 and future years.

2. Beware of Alternative Minimum Tax. AMT is not dead yet. While this tax was eliminated in the House version of the new Act, it has survived the final version of the legislation. The new Act does raise the exemption amount from $86,200 to $109,400 for a joint return ($55,400 to $70,300 single return). Further, the income levels that benefit from these exemptions would increase to $1 million for Married Filing Jointly ($500,000 for all other taxpayers); and from $159,700 for joint taxpayers ($119,700 for Single or Head of Household, $79,850 for Married Filing Separately). This would reduce the amount of taxpayers subject to AMT and decrease the AMT liability for those who are subject to AMT, but it would not eliminate it entirely.

Planning Tip—Many of the adjustments or preferential items that have been part of the alternative minimum taxable income calculation are also being eliminated or reduced for the regular tax under the new Act. However, since the AMT exemption will dramatically increase in 2018, you may want to wait until 2018 to exercise any incentive stock options (ISO) since the favorable tax treatment for ISOs has not changed under the new Act and would not be subject to adjustment for AMT. If you would not be subject to the AMT in 2017, the guiding philosophy of postponing income until 2018 and accelerating deductions (especially charitable contributions) into 2017 rings true.

Now that we have addressed the AMT, at least to the extent possible in such an overview, the balance of this guide will focus on specific planning strategies that normally apply to the vast majority of taxpayers—that is, those in a regular tax situation where the time-honored strategies of accelerating deductible expenses and deferring taxable income will result in maximum tax savings.

3. Review the increased standard deduction and the elimination of the personal exemption. Under the new Act, the standard deduction is nearly doubled from current levels to $24,000 for a joint return and $12,000 for a single return. All personal exemptions you receive for yourself, your spouse and any dependents are eliminated in 2018.

 

**Enhanced Child Tax Credits will be available under the new Act, which, instead of reducing taxable income, like an exemption, reduce taxes owed.

Observation: While the standard deduction is nearly doubled, its inflationary increases are set to chained CPI instead of CPI. In general, chained CPI grows at a slower pace than CPI. Under current law, the inflationary increases in the current standard deduction and personal exemption would have both presumably increased faster than under the new law. While the initial increase in the standard deduction is beneficial and may lead to fewer individuals itemizing over time, this will have to be evaluated by crunching the numbers due to the slower increase in inflation adjustments. We advise our clients to continue tracking itemized deductions still allowed by law throughout the year.

4. Pay any medical bills in 2017. In a rare provision scheduled to be effective in 2017, the new Act reduces the medical expense deduction floor to 7.5 percent of AGI instead of the current 10 percent for both 2017 and 2018. In addition, the deduction would no longer be an AMT preference item, meaning that even taxpayers subject to the AMT in 2017 or 2018 would benefit from deductible medical expenses. These are all favorable changes to taxpayers with high medical costs.

Planning Tip—Pay all medical costs for you, your spouse and any dependents in 2017, if, with payment, your medical expenses are projected to exceed 7.5 percent of your 2017 AGI, as this will lower your tax liability in 2017. However, if you expect to have a higher percentage of medical expenses relative to income in 2018, it may be better to defer these costs.

5. Accelerate your state and local tax deduction into 2017. Possibly the most talked about revision included in earlier versions of the tax reform bill was the repeal of the state and local tax deduction. After intense lobbying from high-tax states (but not terribly effective), the new Act will now allow deductions in 2018 for state and local income or sales, and property taxes, up to a limit of $10,000 per return ($5,000 in the case of a married individual filing separately). While this limitation is much more flexible than previous versions of the bill, many taxpayers will be severely limited in their deductions beginning in 2018.

Planning Tip—If you live in a state with either high income, sales taxes or real estate taxes and you are not subject to AMT, this could significantly change your tax calculation. If you are not subject to AMT during 2017, it is highly recommended you pay your fourth quarter state or local taxes normally due January 15, 2018, by December 31, 2017. You may also wish to consider prepaying any expected 2017 state and local income taxes due in April 2018, at the end of 2017. To the extent that you can also prepay any real estate taxes in 2017, we recommend doing so. Please note that this deduction will not allow for prepayment of 2018 state and local income taxes in 2017. According to a sneaky provision within the new Act, only income taxes for 2017 can be deducted in 2017, though property taxes for 2018 can be paid and deducted in 2017.

6. Prepay your January mortgage payment. The new Act reduces the mortgage interest deduction limitation to interest on up to $750,000 of debt ($375,000 in the case of a married individual filing a separate return), for acquisition indebtedness incurred after December 15, 2017. The mortgage interest from both a taxpayer’s primary and secondary residences remain deductible, up to this balance limit on new debt. Home equity indebtedness, not used to substantially improve a qualified home, will not be deductible in 2018.

Planning Tip—If you hold a home equity loan, which was used for a purpose other than improving your home, make your monthly payment before December 31, 2017, as such home equity interest will not be deductible in 2018. We also recommend prepaying one month’s worth of interest on primary and secondary residences by December 31, 2017. Please make sure that your lender issues you a 2017 Form 1098 reflecting the prepayment of interest for 2017. If you are planning to refinance and your total mortgage balance will exceed $750,000, please contact us to ensure you retain maximum deductibility and do not run afoul of certain rules related to refinancing mortgage indebtedness.

7. Consider accelerating 2018 charitable pledges whether by cash, marketable securities, credit card or donor advised funds to leverage the higher 2017 tax rates. Also, continue to make charitable contributions. Good news here for charitable giving. The new Act raises the 50 percent of AGI limitation to 60 percent, meaning that more prior year charitable carryovers or current year contributions would be available as a deduction starting in 2018.

Planning Tip—The increased limitation makes 2017 and future years a good time to give, as any disallowed amount in 2017 could potentially be freed up in 2018 due to the higher limits. In addition, if you expect to use the standard deduction in 2018 due to the loss or limitation of deductions, consider “bunching” your charitable contributions into 2017 for maximum impact. As always, before making a large contribution, consult your tax advisor to determine the impact on your unique situation.

Observation: However, you should assess whether any increase on charitable contributions for 2017 may be limited by the itemized deduction limitation (known as the “PEASE” limitation), which kicks in when AGI exceeds $305,000 for couples and $254,000 for single taxpayers. The PEASE limitation has been repealed for tax year 2018.

8. Pay all miscellaneous itemized deductions in 2017. In the new Act, all miscellaneous itemized deductions which are subject to the 2 percent floor are repealed. Keep in mind that this 2 percent floor limits this deduction’s applicability to only those individuals whose miscellaneous itemized deductions exceed 2 percent of their AGI, so not all individuals will be affected. Individuals not subject to AMT who incur significant tax preparation fees, investment advisory fees, unreimbursed employee expenses, hobby expenses or legal fees for the collection or production of taxable income could be affected by the elimination of this deduction.

 

Planning Tip—If you are not subject to AMT for 2017, it is prudent to pay such expenses before year-end.

9. Take advantage of the enhanced child tax credit. A major change in the new Act is the enhancement of the child tax credit. In 2018, the child tax credit is increased to $2,000 (from $1,000 for 2017), with the phaseouts of the credit drastically increasing. The child tax credit is phased out beginning at $400,000 for joint filers ($200,000 for all other filers), while in 2017, the credit is phased out beginning at income levels of $110,000 for joint filers and $75,000 for single filers. In addition, more of the child tax credit is refundable to lower income taxpayers without an income tax liability, up to $1,400. Also, non-qualifying child dependents (such as dependents over the age of 17, or those that do not meet the relationship test of a qualifying child) will qualify taxpayers for an additional $500 child tax credit per dependent. 

 

Planning Tip—The expansion of the child tax credit and preservation of the earned income credits in its current form expresses congressional wishes to help growing families. If you have not previously benefitted from the child tax credit, the increased phaseouts may reduce your 2018 tax liability depending on your family size.

Tax-Efficient Investment Strategies

For 2017, long-term capital gains and qualifying dividend income enjoy a tax rate of 0 percent for taxpayers in a regular tax bracket of 10 or 15 percent, 15 percent for taxpayers in the 25 through 35 percent brackets and finally a top rate of 20 percent for taxpayers in the 39.6 percent bracket. A 3.8 percent tax on net investment income applies to taxpayers with modified adjusted gross income (MAGI) that exceeds $250,000 for joint returns ($200,000 single). Below are some ways to capitalize on the lower rates as well as other tax planning strategies for investors.

Planning Tip—The capital gains rates are largely untouched in the new Act with only small changes to the income thresholds to which the zero percent, 15 percent and 20 percent rates are applied. Additionally, the capital gains rate of zero percent for taxpayers in the 10 or 15 percent tax brackets is preserved. Therefore, taxpayers should consider: (1) accelerating income into 2017 in order to reduce 2018 income, and thus qualify for the zero percent capital gain rate in 2018, and/or (2) delaying the sale of long-term capital assets until 2018 if you will be within the 15 percent tax bracket in 2018, which again will qualify use of the zero percent capital gain rate in 2018.

10. Maximize the benefit of lower tax rates on capital gains. To be eligible for the lower 20, 15 or zero percent capital gain rate, a capital asset must be held for more than one year. That is why it is important, when disposing of your appreciated stocks, bonds, investment real estate, and other capital assets, to pay close attention to the holding period. If it is less than one year, consider deferring the sale so you can meet the longer-than-one-year period (unless you have short-term losses to offset). While it is generally not wise to let tax implications be your only consideration in making investment decisions, you should not ignore them either. Keep in mind that realized capital gains may increase AGI, which in turn may reduce your AMT exemption and therefore increase your AMT exposure.

Planning Tip—To take maximum advantage of the spread between capital gain and individual income tax rates, you may wish to consider receiving qualified employer stock options in lieu of salary to convert ordinary compensation income to capital gain income.  However, as noted in item 58, ensure that this strategy does not reduce your tax savings from the deduction for production activities, if applicable, more than it reduces your income tax savings attributable to converting salary income to capital gain income.

11. Reduce the recognized gain or increase the recognized loss. When selling stock or mutual fund shares, the general rule is the shares you acquired first are the ones deemed sold first. However, if you choose, you can specifically identify the shares you are selling when you sell less than your entire holding of a stock or mutual fund. By notifying your broker of the shares you want sold at the time of the sale, your gain or loss from the sale is based on the identified shares. This sales strategy gives you better control over the amount of your gain or loss and whether it is long-term or short-term. While the specification identification method looked to be eliminated under the new Act in favor of a simplified first-in, first-out method, investors had their say and the final version of the legislation does not eliminate the ability to specifically identify lots sold. Once the specific identification method is chosen, however, you may not use a different method (e.g., average cost method or first in, first out method) for the particular security you have specifically identified or throughout the life of the fund (unless with permission from the IRS).

Planning Tip—In order to use the specific identification method, you must ask the broker or fund manager to sell the shares you identify, and maintain records that include both dated copies of letters ordering your fund or broker to sell specific shares as well as written confirmations that your orders were carried out.

12. Take advantage of your capital losses. It always makes sense to periodically review your investment portfolio to see if there are any “losers” you should sell. This is especially true as year-end approaches, since that is your last chance to offset capital gains recognized during the year or to take advantage of the $3,000 ($1,500 for married separate filers) limit on deductible net capital losses. However, one must be mindful not to run afoul of the wash-sale rule, discussed at item 14.

13. Be mindful of new “kiddie tax” rules. The new Act makes a significant change in the taxation of unearned income for children under 18 (or up to age 23, if a full-time student). Currently, unearned income of dependents in excess of $2,100 is taxed at a rate according to the parent’s tax rate. Under the new law, the unearned income of a child would be taxed independently of the parent’s rates, but based on the lower thresholds used by trusts and estates, as seen below. This change would be effective until 2025 when it would revert back to 2017 law.

*Tax rate imposed will depend on the earned income of the child.

Planning Tip—As the 37 percent rate under the new law is effective for joint taxpayers with taxable incomes in excess of $600,000, this change would largely subject the children of parents whose income does not exceed $600,000 to higher rates on unearned income than the provisions under current law.  Because the benefits of recognizing unearned income on the child’s return, rather than the parents’ return, will further decrease under the legislation, the utility of UGMA and UTMA accounts will be further diminished. Instead, parents may wish to hold investment assets in trust accounts.

Planning Tip—There are various measures that can be taken to avoid or minimize the kiddie tax. Among those measures, consider investing a child’s funds in one or more of the following. (1)Owners of Series EE and Series I bonds may defer reporting any interest (i.e., the bond’s increase in value) until the year of final maturity, redemption or other disposition. (If held in the parent’s name and used for qualified higher education expenses, and assuming certain AGI requirements are met, the income is not taxed at all.); (2)Municipal bonds produce tax-free income (although the interest on some specialized types of bonds may be subject to the AMT).; (3)Growth stocks that pay little dividends and focus more on capital appreciation should be considered. The child could sell them after turning 23 and possibly benefit from being in a low tax bracket. Selling them before then could convert a potential zero percent income tax on the gain into a 20 percent income tax. (4) Funds can be invested in mutual funds that concentrate on growth stocks and municipal bonds that limit current income and taxes. They may also limit risk through investment diversification; (5)Unimproved real estate that will appreciate over time and does not produce current income will limit the impact of the kiddie tax; (6) 529 plans offer investors the opportunity to experience tax-free growth, so long as distributions are used to fund qualified education expenses, discussed later at item 22. In addition, contributions to a 529 plan may qualify the donor for a deduction on his or her state income tax return.

14. Do not run afoul of the wash sale rule. An often overlooked rule, the wash sale rule provides that no deduction is allowed for a loss if you acquire substantially identical securities within a 61-day period beginning 30 days before the sale and ending 30 days after the sale. However, there are ways to avoid this rule. For example, you could sell securities at a loss and use the proceeds to acquire similar, but not substantially identical, investments. If you wish to preserve an investment position and realize a tax loss, consider the following options:

• Sell the loss securities and then purchase the same securities no sooner than 31 days later. The risk inherent in this strategy is that any appreciation in the stock that occurs during the waiting period will not benefit you.
• Sell the loss securities and reinvest the proceeds in shares in a mutual fund that invests in securities similar to the security you sold or reinvest the proceeds in the stock of another company in the same industry. This approach considers an industry as a whole, rather than a particular stock. After 30 days, you may wish to repurchase the original holding. This method may reduce the risk during the waiting period.
• Buy more of the same security (double up), wait 31 days and then sell the original lot, thereby recognizing the loss. This strategy allows you to maintain your position but also increases your down side risk. Keep in mind that the wash sale rule typically will not apply to sales of debt securities (such as bonds) since such securities usually are not considered substantially identical due to different issue dates, rates of interest paid, and other terms.

15. Consider dividend-paying stocks. The favorable capital gain tax rates (20, 15 or 0 percent) make dividend-paying stocks as attractive as ever since their preferential lower rates are preserved in current tax reform legislation. This may cause you to reconsider the make-up of your investment portfolio. Keep in mind that to qualify for the lower tax rate on dividends the shareholder must own the dividend-paying stock for more than 60 days during the 121-day period beginning 60 days before the stock’s ex-dividend date. For certain preferred stock, this period is expanded to 90 days during a 181-day period.

Observation: While dividends paid by domestic corporations generally qualify for the lower rate, not all foreign corporation dividends do. Only dividends paid by so-called “qualified foreign corporations,” which include foreign corporations traded on an established U.S. securities market (including American Depository Receipts or ADRs), corporations organized in U.S. possessions and other foreign corporations eligible for certain income tax treaty benefits are eligible for the lower rates. And finally, beware of certain investments marketed as preferred stocks that are really debt instruments (e.g., trust preferred securities). Dividends received on these securities are not qualified dividends, and therefore do not qualify for the preferential capital gain tax rates.

Planning Tip—To achieve even greater tax savings, consider holding bonds and other interest-yielding securities inside qualified plans and IRAs, while having stocks that produce capital gains and qualified dividend income in taxable accounts. In addition, when a taxpayer is fast approaching retirement years, it may be more beneficial to invest in equities outside of the retirement accounts so they may take advantage of the more favorable capital gains rates when they decide to cash-in their investments to satisfy retirement-related expenses.

16. Invest in municipal bonds. Tax-exempt interest is not included in adjusted gross income, so deduction items based on AGI are not adversely affected. As long as your investment portfolio is appropriately diversified, greater weight in municipal bonds may be advantageous. However, be mindful of the AMT impact on income from private activity bonds, which is a preference item for AMT purposes.  In general, a private activity bond is a municipal bond issued after August 7, 1986, whose proceeds are used for a private (i.e., non-public) purpose. Accordingly, review the prospectus of the municipal bond fund to determine if it invests in private activity bonds. Anyone subject to the AMT should avoid these funds. In addition, caution should be exercised as the new Act repeals tax-exempt status for qualified private activity bonds.

17. Avoid mutual fund investment pitfall. Before you invest in a mutual fund prior to February 2018, you should contact the fund manager to determine if year 2017 dividend payouts are expected. If such payouts take place, you may be taxed in 2017 on part of your investment. You need to avoid such payouts, especially if they include large capital gain distributions. In addition, certain dividends from mutual funds are not “qualified” dividend income and therefore are subject to tax at the taxpayer’s marginal income tax rate, rather than at the preferential 20, 15 percent (or zero percent) rate.

If you receive a payout of $5,000, the value of your original shares declines by $5,000—the dividend payment. Furthermore, if you are in the automatic dividend reinvestment plan, so that the $5,000 dividend purchases new shares, the value of your fund should now be about the same as your original investment. However, the $5,000 dividend payout is subject to the preferential tax rates. If it is not a “qualified” dividend, it is subject to tax of up to 39.6 percent. If you had invested after the dividend date, you would own about the same shares, but would have paid no tax!

18. Determine whether you are a trader or investor. Discount brokers and online trading have changed the way many people invest in the stock and securities markets. As a result, many individuals spend a considerable amount of time regularly trading stocks. If this describes you, please let us know as soon as possible, because the tax treatment of your income and expenses from your trading activity can differ dramatically depending on whether the tax law classifies you as a trader or an investor. Your status as a trader or investor may not be clear, so a careful analysis of your situation should be performed before year-end in order to determine your status and the tax planning opportunities that may exist. In general, an investor’s activities are limited to occasional transactions for his own account, while a trader’s activities must be substantial, frequent, regular and continuous.

19. Determine worthless stock in your portfolio. Your basis in stock that becomes totally worthless is deductible (generally as a capital loss) in the year it becomes worthless, but you may need a professional appraiser’s report or other evidence to prove the stock has no value. Instead, consider selling the stock to an unrelated person for at least $1. You have now eliminated the need for an appraiser’s report and are almost guaranteed a loss deduction.

20. Maximize home-related exclusion. Federal law (and many, but not all, states) provides that an individual may exclude, every two years, up to $250,000 ($500,000 for married couples filing jointly) of gain realized from the sale of a principal residence. The exclusion ordinarily does not apply to a vacation home. However, with careful planning, you may be able to apply the exclusion to both of your homes.

Illustration—After selling your principal residence and claiming the allowable exclusion, convert your former vacation home into your new principal residence for at least two years. Establishing residency and use is critical to the success of this technique. Proper conversions result in an additional $250,000/$500,000 of tax-free gain. However, you may still have taxable gain to the extent of depreciation taken. The same strategy applies when two individuals are going to get married and each owns his or her own principal residence. If they do not sell one of the residences before marrying, it may not qualify as a principal residence on a subsequent sale if the residency and use requirements are not met. The result could be a fully taxable sale. You may also qualify for partial gain exclusion in certain circumstances.

Observation—Gain on the sale of a principal residence cannot be excluded if the home was acquired in a like-kind exchange within five years from the date of sale. Therefore, an individual who owns a principal residence, which was originally acquired in a like-kind exchange must wait five years before selling the property in order to exclude gain up to $250,000 ($500,000 for married couples filing jointly).

21. Accelerate like-kind exchanges.As like-kind exchanges for nonreal property will no longer be available beginning in 2018, you should consider initiating a like-kind exchange of personal property (e.g., business automobiles, artwork) by disposing of the property or acquiring the replacement property during 2017.

Observation: Although a like-kind exchange is a powerful tax-planning tool, it includes certain risks. Simply put, it postpones the tax otherwise due on the property exchanged, but it does not eliminate it. The gain will eventually be recognized when the acquired property is sold. In addition, do not exchange property that is worth less than your tax basis in it, since the loss would also be deferred under the like-kind exchange rules. Instead, sell it and take the loss now.

Planning for Higher Education Costs

Many tax savings opportunities exist for education-related expenses. If you or members of your family are incurring these types of expenses now or will be in the near future, it is worth examining them in some detail. Here, in abbreviated form, are some strategies to consider as year-end approaches.

22. Consider Section 529 qualified tuition plans. We will briefly indicate the most important features of these plans, since a full description of these plans is beyond the scope of this guide.

The ownership and control of the plan is with the donor (typically the parent or grandparent of the beneficiary student), not with the beneficiary, so the plan is not considered an asset of the student for financial aid purposes. Consequently, higher financial aid is possible. For federal income tax purposes, plan contributions are on an after-tax basis, although many states allow a deduction. Contributions and earnings on contributions that are subsequently distributed for qualified higher education expenses (including tuition, room and board, and other expenses) at accredited schools anywhere in the United States are free of federal income tax, and may be free of state income tax. With the passage of the new Act, 529 plan owners can now use tax-free distributions for up to $10,000 of eligible expenses at elementary and secondary schools, in addition to colleges and universities. To the extent that distributions are not for qualified higher education expenses, regular income tax plus a 10 percent penalty may apply to the earnings portion of the distribution. As contrasted with the other education strategies discussed below, contributions may be made regardless of the donor’s AGI.

An election can be made to treat a contribution to a Section 529 plan as having been made over a five-year period; consequently, for 2017, a married couple can make a $140,000 contribution to a Section 529 plan without incurring any gift tax liability, since the annual gift exclusion for 2017 is $14,000 per donor (unchanged from 2016) and the contribution can be split with the donor’s spouse. In 2018, the annual gift exclusion will increase to $15,000, thereby also increasing the amount that is eligible for this election.

Observation: Currently, more than 30 states and Washington, D.C., allow a deduction for Section 529 plan contributions. Please make sure you have the correct 529 plan as many states are particular about what type of plan can lead to a state deduction. For example, New York only allows deductions for 529 plans set up under New York law. If you have changed residency since setting up a 529 plan, review your options before contributing.

Finally, in general, to the extent that contributions to a Section 529 plan are not distributed for the benefit of the beneficiary, the account may be transferred to a member of the beneficiary’s family, penalty-free.  As long as the amounts transferred are used for qualified education expenses, they will still be free from federal income tax, as noted above.

23. Be familiar with the education credit options. If you pay college or vocational school tuition and fees for yourself, your spouse or your children, you may be eligible for either the American Opportunity Tax Credit (AOTC) or the Lifetime Learning Credit. These credits reduce taxes dollar-for-dollar, but begin to phase out when 2017 AGI exceeds certain levels. The chart below provides a summary of the phaseouts.

Tax Tidbit—The credits are allowed for tuition paid during the year for education received that year or during the first three months of the next year. Consequently, consider paying part of 2018 tuition at the end of 2017 if you have not maximized the credit or reached the above income thresholds.

Planning Tip—Parents can shift an education credit from their return to the student’s return by electing to forgo child tax credit for the student. This strategy is a “no brainer” for high-income parents whose income prevents them from claiming the credit, or from receiving any benefit from the child tax credit. To benefit from this strategy, however, the student must have sufficient income, and therefore tax liability, to take advantage of the credit. It might be necessary to shift income to the student as well, perhaps through gifts of appreciated property (that the student then sells at a gain) or employment in a family business, as discussed in item 67. However, be careful about the impact on a student’s financial aid—shifting income to a student can have a detrimental impact on a student receiving or being eligible for financial aid.

24. Remit additional student loan payments. An “above the line” deduction of up to $2,500 is allowed for interest due and paid in 2017. The deduction is phased out when AGI exceeds certain levels. The chart below provides a summary of the phaseouts.

25. Contribute to a Coverdell Education Savings Account. These accounts must be established in a tax-exempt trust or custodial account organized exclusively in the United States, at the time the trust or account is established the designated beneficiary must be under 18 (or a special needs beneficiary), and all contributions must be made in cash and are not deductible. The maximum annual contribution is limited to $2,000 per year, and the contribution is phased out when AGI exceeds certain levels. Distributions from Coverdell Education Savings Accounts are excludable from gross income to the extent that the distributions do not exceed the qualified education expenses incurred by the designated beneficiary, which include kindergarten through grade 12, as well as higher education, expenses. If distributions exceed qualified expenses, a portion of the distributions is taxable income to the designated beneficiary.  Furthermore, to the extent that distributions are not used for educational expenses, a 10 percent penalty applies. 

Strategies to Implement Throughout the Year

Virtually any cash-basis taxpayer can benefit from, and can exercise a fair amount of control over, strategies that accelerate deductions or defer income based on the premise that it is generally better to pay taxes later rather than sooner (especially when income tax rates are not scheduled to increase). For example, a check you deliver or mail during 2017 generally qualifies as a payment in 2017, even if the check is not cashed or charged against your account until 2018.  Similarly, payments of deductible expenses by credit cards are not deductible when you pay the credit card bill (for instance, in 2018), but when the charge is made (for instance, in 2017).

With respect to income deferral, cash-basis businesses, for example, can delay year-end billings so that they fall in the following year or accelerate business expenditures to the current year. On the investment side, income from short-term (i.e., maturity of one year or less) obligations like Treasury bills and short-term certificates of deposit is not recognized until maturity, so purchases of such investments at this time will push taxability of such income into 2018. For a wage earner (excluding an employee-shareholder of an S corporation with a 50 percent or greater ownership interest) who is fortunate enough to be expecting a bonus, he or she may be able to arrange with his or her employer to defer the bonus (and his or her tax liability for it) until 2018. However, if any of this income becomes available to the wage earner, whether or not cash is actually received, the bonus will be taxable in 2017. This is known as the constructive receipt doctrine.

26. Participate in and maximize payments to 401(k) plans, 403(b) plans, SEP (self-employed) plans, IRAs, etc. These plans enable you to convert a portion of taxable salary or self-employed earnings into tax deductible contributions to the plan. In addition to being deductible themselves, these items increase the value of other deductions, since they reduce AGI. Deductible contributions to IRAs are generally limited to $5,500 in 2017, while substantially higher amounts can be contributed to 401(k) plans, 403(b) plans and simplified employee pensions (SEPs). For example, $18,000 may be contributed to a 401(k) plan in 2017 as part of the regular limit of $54,000 that may be contributed to a defined contribution (e.g., money purchase, profit-sharing) plan in that year. These limits, as well as the limits for “catch-up” contributions (contributions for individuals who have attained age 50 by the end of the year), are reflected in the table below.

In addition, SEPs, can be established and contributed to as late as the due date of your return, including extensions, or as late as October 15, 2018, for tax year 2017.

Observation: Roth 401(k) accounts can be established to take after-tax contributions, if the traditional 401(k) plan permits such treatment. Some or all of the traditional 401(k) contributions can be designated by the participant as Roth 401(k) contributions, subject to the maximum contributions that already apply to traditional 401(k) plans (including the “catch up” contributions), as reflected in the table below. The Roth 401(k) contributions are not deductible, but distributions from the Roth 401(k) portion of the plan after the participant reaches age 59½ are tax free.

Current Scheduled Annual Retirement Plan Contribution Limits
Type of Plan	2017	2018
IRAs age 50+	$6,500	$6,500
Traditional and Roth IRAs	$5,500	$5,500
Roth and traditional 401(k) and similar plans age 50+	$24,000	$24,500
Roth and traditional 401(k), 403(b) and 457 plans	$18,000	$18,500
SIMPLEs age 50+	$15,500	$15,500
SIMPLEs	$12,500	$12,500
SEPs and defined contribution plans	$54,000	$55,000

27. Contribute the maximum to a nonworking spouse’s IRA. As long as one spouse has $11,000 of earned income in 2017, each spouse can contribute $5,500 to their IRAs. The deductibility of the contributions depends on the AGI reflected on the tax return and on whether the working spouse is a participant in an employer sponsored retirement plan.  Keep in mind that an individual is not considered an active participant in an employer sponsored plan merely because his or her spouse is an active participant for any part of the plan year. Thus, it is possible to have contributions to the working spouse’s IRA that are nondeductible while having contributions to the nonworking spouse’s IRA that are deductible, or to have contributions to both IRAs that are deductible. Any individual making an IRA contribution, whether it is deductible or not, may wish to make it sooner rather than later in order to maximize the tax-deferred income on the contributed amount. In addition, “catch-up” IRA contributions, described above, are also permitted.

28. Consider purchasing annuities. Once you have maximized the use of qualified retirement plans (e.g., SEPs, Keoghs, 401(k)s) and IRAs, the purchase of annuities offers another opportunity for deferral of income, and thus, tax. Due to the time value of money, it is almost always better to pay tax on income, later, rather than sooner. When contemplating retirement, deferral of income is particularly beneficial in scenarios where income is expected to drop in retirement and will thus be subject to lower effective tax rates than those in effect during the comparatively higher income years of employment.

29. Participate in flexible spending accounts (IRC Section 125 accounts). These plans enable employees to set aside funds on a pre-tax basis for (1) medical expenses that are not covered by insurance, (2) dependent-care costs up to $5,000 per year and (3) adoption assistance of up to $13,570 per year. Funds contributed by employees are free of federal income tax (at a maximum rate of 39.6 percent), Social Security and Medicare taxes (at 7.65 percent), and most state income taxes (at maximum rates as high as 13.3 percent), resulting in a tax savings of as much as 60 percent. Paying for these expenses with after-tax dollars, even if they meet various AGI requirements, is more costly under the current tax rate structure. Since many restrictions apply, such as the “use-it-or-lose-it” rule, review this arrangement before making the election to participate.

Illustration—The tax savings resulting from participation in FSAs are often significant. Assume a family contributes $5,000 for uncovered medical costs, and $5,000 for qualified daycare expenses. Assuming a 39.6 percent tax rate, the family creates a tax savings of about $4,720 ($3,960 in income taxes and $760 in Social Security/Medicare taxes, not counting any potential reductions in state income taxes).

Planning Tip—Section 125 plans often adopt a two-and-a-half month grace period (to March 15, 2018) during which employees who participate in the Section 125 plan can incur expenses that can be treated as 2017 qualified expenses. Accordingly, this can potentially reduce employee contributions that would otherwise be subject to forfeiture.

Planning Tip—Married couples who both have access to a flexible spending accounts (FSAs) will also need to decide whose FSA to use  If one spouse’s salary is likely to be higher than the FICA wage limit ($127,200 for 2017) and the other spouse’s salary will be less, the one with the smaller salary should fund as much of the couple’s FSA needs as possible. This is because FSA contributions by the spouse whose income is higher than the FICA wage limit will not reduce the 6.2 percent Social Security tax portion of the FICA tax, but FSA contributions by the other spouse will reduce it.  This planning tip also applies to HSAs mentioned below. For example, if John’s salary is $150,000 and Mary’s salary is $50,000, FSA contributions of $10,000 by John will not reduce his Social Security tax (since, even reflecting the FSA contributions, his Social Security wages exceed $127,200), while FSA contributions of $10,000 by Mary will save her approximately $600 in Social Security tax.

30. Participate in Health Savings Accounts (IRC Section 223 accounts). Health Savings Accounts (HSAs) are another pre-tax medical savings vehicle that are currently highly favored in the marketplace by Congress. HSAs offer a tax-favorable way to set aside funds to meet future medical needs. The four key elements to an HSA include: (1) contributions you make to an HSA are deductible, within limits, (2) contributions your employer makes are not taxed to you, (3) earnings on the funds within the HSA are not taxed, and (4) distributions from the HSA to cover qualified medical expenses are not taxed.

To be eligible for an HSA, you must be covered by a “high deductible health plan.” You must also not be covered by a plan that (1) is not a high deductible health plan and (2) provides coverage for any benefit covered by your high deductible plan. For self-only coverage, the 2017 limit on deductible contributions is $3,400. For family coverage, the 2017 limit on deductible contributions is $6,750.

Planning Tip—The HSA is not a use-it-or-lose-it account like FSA, which means wiser choices can be made in long-term healthcare spending. Funds remaining in a HSA at year-end are not forfeited, but remain in the account tax free until distributed for medical purposes. Like IRAs, an individual owns their HSA. It stays with the individual even after a job change making the HSA a very portable savings device.

31. Consider optimal timing for retirement plan distributions. If you are age 70½ or older, you are normally subject to the minimum distribution rules with regard to your retirement plans. Under these rules, you must receive at least a certain amount each year from your retirement accounts. You can always take out more than the required amount, but anything less is subject to a 50 percent penalty on the shortfall amount. Therefore, if you have not taken your required distribution for 2017, do so before year-end to avoid a hefty penalty.

If you have reached age 70½ in 2017, you can delay your 2017 required distribution until April 1, 2018, if you choose. However, waiting until 2018 will result in two required distributions in 2018—the amount required for 2017 plus the amount required for 2018. While deferring income is normally a sound tax strategy, here it may result in bunching income into 2018, which may or may not push you into a higher tax bracket or have a detrimental impact on other tax deductions you normally claim. A careful timing assessment is needed. “Crunching the numbers” for 2017 and 2018 will help you to determine the optimal timing of the distributions.

Observation: Certain individuals still employed at the age of 70½ are not required to begin receiving minimum required distributions from qualified retirement plans until after they retire, representing another often overlooked method of deferral of tax on retirement savings.

32. Carefully plan Roth conversions. Taxpayers who decide to rollover or convert from a regular IRA to a Roth IRA, and who also expect their AGI and tax bracket to remain more or less constant, should consider staggering the total amount they plan to shift over a period of years. For example, a taxpayer who plans to convert a total of $85,000 from a regular IRA to a Roth IRA should consider converting $17,000 per year for five years. This strategy may prevent the conversion from pushing a taxpayer into a higher tax bracket, since the conversion is fully taxable on the amount converted.

Planning Tip—Before assets are transferred to a Roth IRA, a careful analysis should be performed to project which retirement investment vehicle will be more financially beneficial and the impact of the rollover or conversion on an older taxpayer’s required minimum distribution (RMD) calculations. The goal is to generate more after-tax wealth as a result of the conversion for you and your heirs.

33. Avoid deduction limits for charitable contributions. The charitable deduction for airplanes, boats and vehicles may not exceed the gross proceeds from their re-sale. Form 1098-C must be attached to tax returns claiming these types of noncash charitable contribution. Furthermore, donations of used clothing and household items, including furniture, furnishings, electronics, linens, appliances and similar items must be in “good” or better condition to be deductible. You should maintain a list of such contributions together with photos to establish the item’s condition. To the extent they are not in “good condition,” you will need to secure a written appraisal to deduct individual items valued at more than $500.

Planning Tip—Collect substantiation for cash contributions. Charitable contributions of money must be supported by a canceled check, bank record, or receipt from the donee organization showing the name of the organization, the date of the contribution, and the amount of the contribution. Charitable contributions in excess of $250 must have a written acknowledgment from the organization.

Illustration—Substantiation of charitable contributions has grown in importance in the eyes of the courts and the IRS. If you are thinking of making a large non-cash charitable contribution that is not in the form of publically traded stock, make sure you acquire the correct information and forms needed to substantiate your deduction. The chart below is a useful guide for determining what you need to have in order to deduct your non-cash charitable contribution.

34. Make charitable contributions of up to $100,000 of 2017 distributions from IRAs. Current law provides an exclusion from gross income for certain distributions of up to $100,000 per year from a traditional IRA, where the distribution is contributed to a qualified tax-exempt organization to which deductible contributions can be made. This special treatment, which was made permanent under the PATH Act of 2015, applies only to distributions made on or after the date the IRA owner attains age 70½  and must be made directly from the IRA trustee to the charitable organization. Distributions that are excluded from income under this provision are not allowed as a deduction.

Observation: The provision can save taxes for those who itemize their deductions to the extent that AGI limitations would have otherwise reduced the amount of charitable contributions currently deductible. In addition, excluding the IRA distributions from AGI also results in a lower AGI, which may make deductions affected by AGI (such as medical deductions and miscellaneous itemized deductions) more valuable and may also reduce the amount of Social Security benefits that are subject to tax.

Planning Tip—Qualifying charitable distributions can be used to satisfy Required Minimum Distribution (RMD) requirements, thus allowing taxpayers to exclude income they would otherwise be required to include. As a practical matter however, such charitable distributions may not be made to a private foundation or donor advised fund.

35. Make intelligent gifts to charities. Do not give away loser stocks (those that are worth less today than what you paid for them). Instead, sell the shares and take advantage of the resulting capital loss to shelter your capital gains or income from other sources, as explained above. Then give cash to the charity. Since you just sold the stock, you will have the cash on hand. As for winner stocks, give them away to charity instead of donating cash. Under either situation, you recognize multiple tax benefits. When gifting appreciated stock to charity, you not only avoid paying capital gains taxes and gift taxes, but you may also be able to deduct the value of the stock for income tax and AMT purposes.

Planning Tip—Consider making a qualified conservation contribution, which is a contribution of real property interests exclusively for conservation purposes, including remainder interests and use restrictions granted in perpetuity. The charitable deduction is taken in the year of the transfer even though the charity does not receive the property until a later time, if ever.

For example, you can donate an easement on scenic farmland next to a national park and continue to farm the property. You may have to grant some access to the public, depending on the circumstances, but this can be limited in a manner that permits your continued enjoyment of the property. The amount of the deduction is generally the present value of the remainder interest on the date of the gift. Like other charitable contributions, gifts of remainder interests are subject to the AGI limitations and other restrictions on charitable deductions so contact us for details.

Another strategy to consider is a charitable remainder trust, where income-producing assets are transferred to an irrevocable trust. The donor or other noncharitable beneficiaries receive trust income for life, or for a period of years. The donor receives an up-front charitable contribution equal to the present value of the remainder interest. The charity receives the remaining trust assets when the income interests end.

36. Consider deducting state and local sales taxes in lieu of deducting state income taxes. For 2017, instead of deducting state and local income taxes, taxpayers are able to choose to deduct state and local sales taxes by either (1) accumulating receipts or (2) using IRS sales tax tables and adding actual sales taxes paid for major items, such as vehicles. Accordingly, to the extent possible, accumulate the receipts reflecting sales taxes you have paid this year and compare the total to the state income taxes paid this year. Keep in mind that the deduction for state and local sales taxes includes the amount provided in IRS tables plus the amounts of general state and local sales taxes paid on the purchase of motor vehicles, boats and airplanes.

Observation: This provision is attractive to taxpayers residing in states without an income tax, such as Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming; states that tax only dividends, such as New Hampshire and Tennessee; and in lower tax rate jurisdictions.

37. Charge charitable contributions. Charitable contributions charged to a credit card are deductible in the year charged, not when payment is made on the card. Therefore, charging charitable contributions to your credit card before year-end enables you to increase your 2017 charitable contributions deduction even if you are temporarily short on cash or simply want to defer payment until next year. Note, however, that any interest paid with respect to the charge is not deductible.

38. “Bunch” itemized deductions. Consider paying state and local taxes, medical expenses, charitable gifts, etc. in the same year as opposed to spreading the payments over two years. By bunching deductions and deferring taxable income along with using AGI-reducing techniques, you increase the value of all deductions and reduce your overall tax liability. If your 2017 AGI exceeds the $261,500 threshold for single taxpayers ($313,800 joint), however, the effectiveness of the bunching technique may be reduced as your itemized deductions will be limited. As always, consideration must also be given to the AMT.

In considering the strategies noted below, however, keep in mind that if you pay a deductible expense in December 2017 instead of in January 2018, you reduce your 2017 tax instead of your 2018 tax, but you also lose the use of your money for one month. Generally, this will be to your advantage, unless you have an alternative use for the funds that will produce a rate of return in that one month that will exceed the tax savings.  In other words, you must decide whether the cash used to pay the expense early should be for something more urgent or more valuable than the increased tax benefit.

State and local taxes. As we discussed in item 5 above, consider paying in December 2017 those state and local taxes that have accrued (property, estimated income, etc.) that you would normally pay in the first part of 2018. This will allow you to accelerate your federal tax deduction a full year, if applicable. Since state and local taxes are not deductible for AMT purposes, however, review your regular and AMT positions to determine the most effective tax strategy.

Planning Tip—If your deduction for sales taxes will be greater than the state and local income taxes deduction, you experience no tax benefit by accelerating your state and local tax payments.

Deductible mortgage interest. As discussed above in item 6, you may wish to pay your January 2018 payment in December 2017.

Planning Tip—With interest rates expected to rise in the near term, consider refinancing your mortgage to take advantage of the current lower rates. Any points you paid on a previous refinancing that have not been fully amortized would be deductible in full in 2017 as long as the previous mortgage is paid off by the end of the year. And even though the interest paid on a lower rate mortgage would be less, and would result in a smaller tax deduction, it also would improve your monthly cash flow. In other words, as noted above, use sound economic planning in your decision-making process rather than viewing every transaction in terms of its tax effect.

The following chart illustrates the tax treatment of selected types of interest.

^* Deductibility may be subject to other rules and restrictions

¹Generally limited to net investment income

² For 2017, including debt of up to $1,100,000 associated with primary and one secondary residence

³ Subject to passive activity rules

Charitable contributions. As discussed in item 7 above, consider paying 2018 pledges in 2017 to maximize the “bunching” effect.

Investment interest. This is interest on loans used to purchase or carry property held for investment purposes (e.g., interest on margin accounts, interest on debt used to purchase taxable bonds, stock, etc.). Investment interest is fully deductible to the extent of net investment income, unless incurred to purchase securities that produce tax-exempt income. Net investment income is equal to investment income less deductible investment expenses. Sources of investment income include income from interest, nonqualified dividends, rents and royalties. Investment expenses include depreciation, depletion, attorney fees, accounting fees and management fees. If you bunch your investment expenses in one year so that little or no investment interest is deductible, the nondeductible investment interest can be carried forward to a succeeding tax year. The deduction for investment interest was preserved by the new Act.

You may be able to convert nondeductible interest to deductible investment interest by rearranging your borrowing. In addition, you may be able to increase your otherwise nondeductible investment interest by disposing of property that will generate a short-term capital gain. The extra investment interest deduction may even offset the entire tax on the gain. Disposing of property that will generate long-term capital gain will not increase your investment income unless you elect to pay regular income tax rates on the gain.  Accordingly, you should review your debt and investment positions before disposing of such property.

Planning Tip—An election can be made to treat qualified dividend income as nonqualified. This would increase the amount of net investment income and consequently the amount of deductible investment interest. Although the election would result in qualified dividend income being taxed at the taxpayer’s top marginal income tax rate, rather than, in general, at a 20 percent rate, tax savings could result. The only way to determine if this makes sense is to “crunch the numbers” and see if the overall tax liability decreases. Since investment interest is deductible for AMT purposes, making this election could reduce the AMT.

Medical and dental expenses. As discussed in item 4 above, medical deduction is allowed only to the extent that your unreimbursed medical outlays exceed 7.5 percent of your AGI. To exceed this threshold, you may have to bunch expenses into a single year by accelerating or deferring payment, as appropriate.

Planning Tip—Keep in mind that premiums paid on a qualified long-term care insurance policy are deductible as medical expenses. The maximum amount of the deduction is based on the taxpayer’s age. For example, the deduction for such premiums paid for an individual age 40 or less is limited to $410, while the deduction for an individual age 71 or older is limited to $5,110. These limitations are per person, not per tax return, so a married couple where both husband and wife are 71 or older would be entitled to a maximum deduction of $10,220, subject to the 7.5 percent of AGI floor noted above.

Observation: A divorced parent generally can deduct medical payments incurred for his or her child even though the other parent claims the dependency exemption. Also, a child may be entitled to a deduction for the medical expenses paid on behalf of a parent, even though he or she cannot claim the parent as a dependent because the parent has gross income of at least $4,050 in 2017.

Miscellaneous itemized deductions. Bunching miscellaneous itemized deductions, such as tax preparation fees, investment advisory fees and other expenses incurred in generating investment income, in one year, in order to exceed the 2 percent of AGI floor that applies to such deductions, may also reduce your tax liability. Again, however, keep in mind that miscellaneous itemized deductions are not deductible for AMT purposes. However, as discussed in item 8 above, all miscellaneous deductions are eliminated under the new Act. Accordingly, if you are not subject to AMT, it is wise to pay these expenses in 2017. 

39. Determine your level of participation in activities to either avoid or qualify for passive activity loss treatment. In general, if an individual spends more than 500 hours participating in an activity during the year, the activity will not be considered passive. There are other exceptions, as well.

As for real estate professionals, eligible taxpayers may deduct losses and credits from rental real estate activities in which they materially participate, since they will not be treated as passive and may be used to reduce nonpassive income. An eligible taxpayer for these purposes spends more than 750 hours of services during the tax year in real property trades or businesses.  In addition, a taxpayer’s personal use, or rental to others, of a vacation home during the last few days of the year may have a substantial tax impact.

40. Do not overlook the advantages of selling passive activities to free up suspended losses. Passive losses can be used to offset nonpassive income in the year you dispose of or abandon your entire interest in the activity in a taxable transaction, whether the transaction results in a gain or a loss.

Planning Tip—Dual tax benefit. If you have sufficient capital gains, you can sell a passive activity for a capital loss, offset the capital loss against the capital gains, and also deduct prior year suspended losses from that passive activity. Should the sale result in a gain, this may still be a sound strategy since the gain will be taxed at a rate lower than the ordinary tax rate permitted for the passive loss.Once again, crunch the numbers to determine the tax impact.

41. Increase your basis in partnerships or S corporations to take advantage of any losses generated by the pass-through entities. Keep in mind that loans made by a third party lender to an S corporation, and guaranteed by an S corporation shareholder, do not increase the shareholder’s basis. The loan must be directly from the S corporation shareholder to the S corporation in order to increase his or her basis.

42. Pending divorce and marriage plans as well as employment changes, illness and retirement should include a review of the tax impact for 2017 and beyond. In regards to divorce and tax reform, the new Act treats alimony paid as a nondeductible expense (and non-taxable to the recipient) for divorce decrees, separation agreements, and certain modifications entered into after December 31, 2018. While initial versions of the bill slated this provision to take effect on January 1, 2018, divorcing couples now have an extra year to finalize proceedings without worrying about the tax effects of this otherwise life-changing event.

43. Take advantage of the $14,000 annual gift exclusion and unlimited medical and education expense exclusion. A donor may make a gift of $14,000 to any one donee or $28,000 to any one donee provided the donor is married and the gift is split with his or her spouse. Thus, a gift of $56,000 may be made by a husband and wife to another married couple. Medical and education expenses paid directly to the providing institution are not subject to gift tax. In addition, as indicated in the education planning section, contributions to Section 529 plans may also qualify for special gift tax exclusion treatment. A substantial tax reduction can be achieved by making gifts to your child or grandchild. In 2018, this exclusion will increase to $15,000.

For example, a parent can reduce the capital gains tax from the 20 percent rate to potentially zero percent by gifting stock or certain mutual funds, in lieu of cash, to a child or grandchild who is in the 10 percent or 15 percent tax bracket. Keep in mind that gifting to a child under 23 may not have the desired effect, since the “kiddie tax” may result in some of his or her income being taxed at your higher income tax rate. See item 13 above.

Observation: Even gifts that are not covered by the exclusion, and thus taxable, may not result in a tax liability. This is so because a tax credit wipes out the federal gift tax liability on the first taxable gifts that you make in your lifetime, up to $5,490,000 (for 2017). However, to the extent you use this credit against a gift tax liability, it reduces (or eliminates) the credit available for use against the federal estate tax at your death. The new Act doubles the unified credit for purposes of the estate, gift and generation-skipping tax to an inflation indexed $10 million ($11,200,000 for 2018).

Planning Tip—All of the strategies and observations noted in this guide are aimed at minimizing your income and gift tax costs. In other words, it is important that you ensure that your current and future wealth are not unduly diminished by those taxes. Although our focus is not on gift and estate tax planning, we strongly recommend that you consult with estate planning professionals to discuss such topics as gift, estate and generation-skipping transfer (GST) tax exemptions, the unlimited marital deduction, each spouse’s exemption, and related items.

44. Increase federal tax withholding to avoid the underpayment of estimated tax penalty. For taxpayers with AGI of more than $150,000, 110 percent of your prior year liability (or 90 percent of your current year liability) must be paid to avoid the penalty. Attempting to compute how much tax you will owe and when you must pay it to avoid underpayment penalties is the key to determining which of the two methods to use. Accordingly, minimizing 2017 taxable income will result in the lowest possible estimated tax payments in 2018, if using the prior year safe harbor method. In addition, since withholding is treated as being paid equally throughout the year, a penalty for an estimate that was paid late can be eliminated through increased withholding. Similarly, you may wish to increase withholding of state and local taxes to avoid underpayment penalties and accelerate a federal tax deduction.

Planning Tip—If you are not earning wages but are taking distributions from qualified plans or IRAs, federal tax withholding on those distributions could also result in avoiding the underpayment of estimated tax penalty.

45. Review your estate plan documents. Despite the new Act doubling the estate, gift and GST tax exemptions to $11.2 million per U.S. domiciliary, wealth transfer strategies are important. If you have not examined your estate plan within the last two years, you should consider doing so immediately. While addressing your will, also consider the benefits of a living will, medical power of attorney and durable power of attorney and the appropriateness of your beneficiary designations on your retirement accounts and life insurance policies.

46. Consider tax payments by credit card. IRS accepts tax payments by credit and debit cards. Consequently, taxpayers may wish to pay tax payments with a credit card to earn frequent flyer miles, cash-back bonuses, reward points and other perks. The fees charged to you (on average 2.5 percent of the tax paid) by the card issuer, however, may exceed the benefits received.

47. Qualify for plug-in energy tax credits. The qualified plug-in electric drive motor vehicle credit is primarily for four wheeled vehicles that meet certain battery and kilowatt requirements. The base amount of the credit is $2,500 per vehicle. The allowable credit increases to $5,000 per vehicle based on a formula which increases the credit by $417 for every kilowatt hour of battery capacity in excess of five.

Observation: The credit is not subject to any income phaseouts for high-income taxpayers, which makes buying one of these qualified vehicles a perfect end of year tax saving maneuver.

48. Consider accelerating life insurance benefits. Subject to certain requirements, an individual who is chronically or terminally ill may exclude payments received under a life insurance policy from income. Similarly, payments received from selling a life insurance policy to a viatical settlement provider, who regularly engages in the business of purchasing or taking assignments of such policies, may also be excluded.

49. Exclude amounts received for physical injuries and deduct qualified legal fees against gross income. Although amounts received as damages attributable to non-physical injuries and punitive damages are gross income in the year received, amounts received for physical injuries are excluded from gross income. Legal fees attributable to employment-related unlawful discrimination lawsuits (as well as certain other actions) are chargeable against gross income. Finally, damages received by a spouse, which are due to loss of consortium due to physical injuries of the other spouse, are also excluded from income. However, it is important to note that settlements must be properly structured in order to capitalize on these deductions and exclusions.

50. Deduct moving expenses. In 2017, qualified moving expenses are deductible whether or not the individual incurring them itemizes his or her deductions, so there are no AGI phaseouts to address. Qualified expenses include the cost of moving household goods and personal effects, plus traveling (including lodging but not meals) to your new residence from your old residence. Distance, length of employment and commencement of work tests must be satisfied in order for the expenses to be deductible. However, this deduction was repealed in the new Act, beginning in 2018 for individuals who are not active duty members of the armed forces.

Planning Tip—Pay all deductible moving expenses prior to the end of 2017, as the deduction expires on December 31.

51. Manage your nanny tax. If you employ household workers, try to keep payments to each household worker under $2,000 ($2,100 for 2018). If you pay $2,000 or more to a worker, you are required to withhold Social Security and Medicare taxes from them, and remit those withholdings, along with matching employer payroll taxes, on your individual income tax return, on Schedule H.