by Tina Perkins
Procrastinate no more. By the time you read this article you might have two months to squeeze in tax planning and to carry out your action plan to minimize your 2017 taxes.
Tax planning isn’t just for the wealthy. Tax planning is for everyone who wants to keep more of their earnings and net worth and pay as little as possible to the government. Below are some opportunities worth considering.
INDIVIDUAL TAXPAYER
Should you itemize your deductions or take the standard deduction? Knowing what your 2017 tax situation will be and having an idea of your 2018 tax situation, you are better informed to decide if you should maximize your 2017 itemize deductions or push these deductions into 2018. For instance, you may find it better to: (1) suspend your 2017 charitable contributions and double up on your 2018 charitable contributions; and/or (2) pay your 2017 real property taxes in early 2018 before the due date and then pay the 2018 real property taxes before December 31, 2018. This works really well if you are borderline not able to itemize or if your tax bracket for 2017 is lower than your 2018.
INVESTOR
Is the investor better off selling his investment property in 2017 or in 2018? Accelerate the sale of a capital gain investment in 2017 if you already have a capital loss on the books. Your capital losses offset your capital gains. Also, sell in 2017 if you are in the 15 percent or lower tax bracket, are expecting to be in a higher tax bracket for 2018, and would create a long-term capital gain on your investment sale. Your taxes would be zero on this sale. In contrast, sell your investment in 2018 if you expect to be in the 15 percent tax bracket for 2018 and are in a higher bracket for 2017. If the sale of your investment creates a capital loss, you want to sell in the year that you are in the higher tax bracket.
SMALL BUSINESS OWNER (SOLE PROPRIETOR)
Know the financial status of your business! Proprietors pay a 15.3 percent self-employment tax in addition to the income taxes on the net profits. Take advantage of the section 179 deduction by making major purchases before year end. This can have a major impact to lowering your taxes. Also, fund your retirement. Although the proprietor has until the filing of his tax return to fund his retirement, he has to have the simple retirement plan in place by October 1. Retirement contributions will reduce your income taxes but not your self-employment tax. In summary, get your business affairs in order and meet with your tax professional before the year ends while opportunities are available. Seek the advice of an investment advisor for creating your retirement plan.
RETIRED TAXPAYER
Contributions and earnings to a qualified retirement plan eventually become subjected to income taxes. This is also true for the earnings of a non-qualified plan. A retiree should evaluate his situation to see if taking (or increasing) a distribution would be tax efficient.
In a recent evaluation of an 80-plus year person’s annuity plan, I learned that he wants to leave his $40,000 annuity to his adult son. Of the $40,000, the earnings of $15,000 are going to be taxed to whoever receives the earnings. If the retiree’s wish is fulfilled and his son inherits it, the son will pay tax at his marginal rate on the $15,000. The son will pay $2,250 or $3,750 if in the 15 percent or 25 percent respective tax brackets. If instead, the retiree takes the $15,000 earnings over a two year period, he could avoid paying taxes altogether since his sources of income from a small pension and social security aren’t enough for him to have a tax liability. He should then put the distributed funds into another investment and make his son the beneficiary. Upon the retiree’s passing, the son receives the entire $40,000 tax free, satisfying his dad’s wish.
RETIREMENT CONTRIBUTOR
You are never too young to make retirement contributions. In fact, the earlier you start contributing, the better. You may feel that you are too poor to contribute to a retirement. I will admit, it is difficult at times to sock away money that you need today. However, the government gives you a tax credit for retirement contributions if you qualify.
Qualifications are: Age 18 or older; not a full-time student; not claimed as a dependent on another person’s return.
The credit is 50 percent, 20 percent and 10 percent of your contributions up to $2,000/person depending on your adjusted gross income, which must be at or below the following amounts: $62,000 – Married Filing Jointly; $45,750 – Head of Household; $30,500 – Single or Married Filing Separately.
Tax planning works. These and other tax planning opportunities can gain you more after-tax dollars.
Remember that everyone’s tax situation is different and the tax impact would likewise be different. In addition, tax reform could negate benefits planned for future years. You should talk with your tax advisor about your personal tax situation.
For more information, call Tina Perkins, CPA, at (228) 392-2991 at Tina Perkins, CPA, P.A., 4048 Popps Ferry Road, D’Iberville, MS 39540. By appointment only.