By Nancy G. Montanye, CPA, CFP

The traditional rules of deferring income and accelerating deductions to minimize taxes can be called into question when tax laws or personal circumstances change. The general guidelines have been based on everything remaining the same. In recent years, Congress typically passed tax legislation late in the year with some retroactive features. Then the IRS, tax software developers, and tax professionals scrambled to get up to speed with forms, instructions, and expertise at the last minute. Once again, tax legislation will pass quite late in the year, but a distinguishing factor this year is that the proposals being discussed are much more significant. Being considered are compressing the tax brackets from seven to three, increasing the standard deduction, and disallowing certain itemized deductions (such as state taxes).

Some of these changes may take effect in 2018, but passage of the proposed tax plan in full seems unlikely as of this writing. Even with all the unknowns, there are plenty of opportunities to be proactive and to reduce your taxes. A little bit of planning can easily impact this year and next year. For instance, you could change the timing of a transaction from December to January (or vice versa) and make a huge difference tax-wise. If you strictly wait until after the year-end, with tax documents in hand, your ability to reduce taxes becomes limited to making an IRA deduction (if eligible) or choosing from various election options. At tax time, almost everything is historical.

With advance action, either near year-end or when applicable circumstances arise, significant savings are possible. Meet with your tax adviser to review your personal situation, particularly any contemplated changes. Tax projection software can predict the impact of “what if” scenarios and make sure that enough federal, state, and local taxes have been paid. It can also show how changing one area can impact another, such as how increasing an IRA withdrawal can increase the taxable amount of Social Security. Or maybe use it to check on phase-out thresholds for various tax benefits, such as education credits, child tax credits, IRA contribution limits, or Alternative Minimum Tax.

Here are just a few personal tax planning ideas:

• Consider selling some of your investments to take advantage of the current low long-term capital gains tax rates. For even further tax impact, offset some gains with losses. Carefully evaluate how much to sell to stay in the same tax bracket, or to avoid other negative impacts.
• Consider the amounts of gifts made and whether a gift tax return will be needed.
• Consider the impact of any change in filing status. For example, going from single to married filing jointly will generally lower overall tax. However, the tax tables may not work well for certain couples, especially where each has good wages.
• Consider the impact of any change in dependents: births and age, such as eligibility for child tax credit, education credits, etc. Consider whether phase-outs apply and may reduce such credits.
• Consider your retirement contribution type: regular vs Roth. The former is deductible now and taxable when withdrawn; Roths are not deductible now nor are they taxable later.
• If receiving IRA distributions before age 59 1/2, consider substantially equal payments to avoid early withdrawal penalties.
• Plan when to start collecting Social Security, and understand the implications of taking it early versus at full retirement or later. Benefits differ under each scenario. Also, the amount of earnings is limited if Social Security is taken before full retirement. Up to 85 percent of Social Security benefits may be taxable, so it is advisable to do some tax planning to determine whether any tax withholding is needed.
• Required minimum distributions (RMDs) must begin from regular IRAs in the year the owner turns age 70 1/2. There is a 50 percent excise tax for failure to take RMDs.
• Rental real estate has different rules depending on usage, active participation, and income. Tax planning is critical when the property is sold to consider the availability of unused passive losses, the capital gains, and the need for estimated tax payments.
• Itemized deductions will be more limited if the current tax proposal passes. This may be a good year to bunch deductions as much as possible.
• Business (Schedule C) and hobby income are both taxable. Expenses are fully deductible for businesses, but limited for hobbies. Self-employment tax is due on business income over $400. (1099-Misc Income, Box 7, is self-employment income reported to independent contractors.)
• Home office deduction can be claimed for regular and exclusive use of a home office, if requirements are met. A simplified method is available for calculating the deduction.
• Cancellation of debt is generally taxable, with some exceptions, including insolvency.
• Lawsuit settlements may or may not be taxable. For example, awards for personal injury are not taxable, while pain and suffering settlements are taxable. Therefore, the way a settlement is structured can significantly impact the net amount of lawsuit received after taxes.
• Lottery winnings or other windfalls also require tax planning. Even if tax is withheld, an additional tax payment may be needed.

The above list is not all-inclusive. Everyone’s situation is unique. Often, though, people wind up paying more in taxes than necessary, getting squeezed from both ends with higher tax rates and fewer deductions. By knowing the tax implications of the decisions you make, you can increase your confidence in your financial future.

The key to tax planning is to keep abreast of tax law changes, and to remember to modify your plan due to life changes and new goals. Be proactive and make the choices that are best for you. Revisit your plan with a tax professional as needed. Know that you are doing what is best for you and your family by developing an individualized tax plan.

Nancy G. Montanye, CPA, CFP, is a sole practitioner in Williamsport, Pa. She is a PICPA member and serves on the CPA Image Enhancement Committee.