Both the House of Representatives and the Senate passed the federal tax reform bill of 2017 on Wednesday, Dec. 20, and President Trump has vowed to sign it into law soon. Here are some things you can do before the end of the year to lower your 2017 federal income tax liability.
The standard deduction will increase from $6,350 to $12,000 for single taxpayers, from $12,700 to $24,000 for married couples filing jointly and from $9,350 up to $18,000 for heads of households. The effect of this change is that fewer individual taxpayers will be able to itemize their deductions starting in 2018. Currently, it’s estimated that approximately one-third of individual taxpayers itemize their deductions. That could fall to as low as five percent of taxpayers in 2018.
What does this mean for you? Well, if you currently itemize and your itemized deductions will total more than the increased standard deduction in 2018, you will continue to itemize, although some of your itemized deductions will most likely be limited or eliminated.
However, if you currently itemize but your itemized deductions will not total more than your new standard deduction in 2018, you will switch to using the standard deduction. If you find yourself in that situation, there are some relatively easy things you can do before the end of the year to take advantage of your itemized deductions before they no longer matter for you.
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▪ If you pay your property taxes yourself, while only one-half of your property taxes are due in December, you might consider paying the full amount to increase your itemized deductions in 2017. Remember, if you can’t itemize your deductions in 2018, any property taxes you pay next year won’t reduce your federal income tax liability. If you have the funds available, why not accelerate those deductions into 2017 when they will reduce your federal income tax liability? Even if you don’t have the funds available, it might make sense to take out a short-term loan to pay these items early as long as the tax savings exceeds the interest cost.
▪ In addition to prepaying your property taxes, there are a few other types of expenses you can accelerate into 2017. For instance, think about the charitable contributions you typically make during the year. Why not make some of them now instead of waiting until 2018 when they won’t reduce your federal income tax liability? You can also pay your January mortgage payment in December for the same reason.
▪ If you make state estimated income tax payments, you can make those payments in December instead of waiting to pay any tax due in April 2018. If you are an employee, it might be more difficult for your employer to withhold additional state income taxes in December but it’s possible.
You need to act quickly. To be deductible in 2017, property tax payments, charitable contributions and estimated state income tax payments must be postmarked on or before Dec. 31, and mortgage payments must be processed by your mortgage company on or before Dec. 31.
You could always use a debit or credit card to pay some of these items too. Making these types of advance payments around the holidays might not sound like much fun, but when you think about the tax savings, you’ll feel better.
Janet Mosebach is an associate professor of accountancy at Boise State University. email@example.com.