As 2017 and its legislative session draw to a close, Congress appears poised to pass major tax reform. While this isn’t a certainty, and many of the details are still being hammered out, we can draw some basic conclusions at this point.
Assuming the legislation passes, there will be fundamental changes in business and personal tax bills. There are tax savings on the horizon—at least in the short term—and there are also likely to be some deductions eliminated. This leaves many people wondering how best to prepare for upcoming tax changes that are probably going to manifest in 2018.
Before proceeding, we just want to emphasize that this is based on information available as the House of Representatives and the Senate seek to finalize a version of the Republican tax bill that enough members of both chambers agree on. But as the end of the year rapidly approaches, you can take steps now to benefit at filing time in the new year.
Taking Advantage of the Lower Tax Rate
It appears that many individuals and businesses can expect a lower tax rate in 2018 if the tax bill passes in the House and Senate and is signed into law by the president. Generally speaking, the best strategy to benefit from this now is to defer income into next year where possible so it will be taxed at the lower rate.
Here are some common ways this can be achieved:
- If you’re receiving a bonus at work, ask your employer to wait to issue it until the new year
- Wait until 2018 to convert your regular IRA into a Roth IRA to defer income from the conversion
- Hold off on billing clients until the new year (or even just until the last minute this year, so that payments arrive in the new year)
- For businesses on the accrual basis, find opportunities to postpone completion of services or delivery of goods until the start of 2018; rules in this area are complicated, though, so consult with a tax professional
- Wait until January to make any deals with creditors to reduce your debt, as reduction or cancellation of debt typically qualifies as income
Preparing for Disappearing Deductions
It looks like a number of familiar deductions will be repealed or reduced in 2018 as trade-off for a larger standard deduction. Here are some possible ways to prepare for upcoming tax changes of this nature:
- If you’re planning to make a donation in the near future, do it before the end of the year, as charitable contributions may not offer a tax benefit come 2018 (this itemized deduction isn’t slated for elimination, but more people will be taking the larger standard deduction)
- There’s a chance the itemized deduction for medical expenses will be eliminated, so get in any possible medical expenditure before the end of 2017, such as getting your new eyeglasses, buying medical devices, tending to dental work, etc.
- Moving expenses will probably not be deductible come the new year, so if you’re in the process of relocating, try to incur as many of the expenses as possible before the end of December
- This one’s a tax credit, not a deduction, but if you’re planning to buy a plug-in electric vehicle, the tax credit for doing so may be eliminated next year, so bump up your purchase to 2017