Top 10 Year End Tax Planning Mistakes

#10 – Failure to rebalance your stock portfolio’s asset allocation and harvest capital losses to minimize 2017 recognized capital gains. Beginning in 2018, under the new tax law proposals, taxpayers will no longer be able to choose stocks with a higher tax basis to sell.

Taxpayers will be required to use the FIFO method, first-in first-out method for identifying the cost basis for stocks being sold. This method usually results in lower cost basis for stock being sold and thus higher taxes! December, 2017 is the last month in which taxpayers have a choice in determining which stocks to sell at a higher tax basis.

#9 – Failure to purchase furniture, equipment, tools, computers and other fixed assets by December 31, 2017. If business owners plan to purchase those assets during the first six months of 2018, they should consider purchasing those assets in December, 2017. In doing so, business owners may save more taxes on those purchases because tax rates for business owners are expected to be lower in 2018.

#8 – Failure to set up your solo 401k plan or other retirement plan by December 31, 2017! Some retirement plans can be set up by the due date of your tax return but other retirement plans are required to be set up by the end of the year. Keep in mind that your company can set up a retirement plan in December and have until the due date of the tax return in 2018 in which to fund the contributions to the plan.

Contact your CPA to advise you on what type of retirement plan would be most advantageous for you as a business owner in order to maximize the contributions to be made by the business for the owner and to minimize the contributions to the plan for your employees. Plan design is very important!

#7 – Failure how to fully pay your 2017 state and local taxes by December 31, 2017. Under the new tax law proposals, state and local income taxes will no longer be deductible in 2018. Therefore,  you should be estimating how much your 2017 state and city tax liabilities will be and make sure that you make estimated payments by the end of the year to pay those tax liabilities in full.

However, if you are subject to Alternative Minimum Tax (AMT) , then you would not need to pay your state and local taxes in December since you will not get any tax benefit in doing so for 2017.

On the other hand, if you are in Alternative Minimum Tax, you may want to accelerate income into 2017 since that additional income may not increase your taxable income. Your CPA should be contacted to make your projected 2017 tax computations for AMT and regular tax purposes.

#6 – Failure to meet with your CPA and estimate your 2017 taxable income and determine whether you expect 2018 to be better or worse. It is imperative that you review year-end tax saving strategies in December, 2017 with your CPA to take advantage of the Trump tax law proposals that we expect to be effective January 1, 2018.

After you meet with your CPA, if you need a second opinion or do not fully understand the tax planning strategies being recommended to you, call Bill Hesch, attorney, CPA and financial advisor to get a second opinion at 513-509-7829. Peace of mind is only a phone call away.

#5 – Failure to review your choice of entity with your CPA! The question is whether under the new tax law to be effective in 2018, should you continue to be a sole proprietor, partnership, S corporation or C corporation for your business? Keep in mind that the decision to terminate or make an S election for 2018 must be filed with the IRS by March 15, 2018. However you should be reviewing the new tax law with your CPA as soon as it becomes final. We are expecting Congress to pass the new tax legislation by Christmas, 2017.

#4 – Failure to review your divorce decree and identify whether it would be advisable for you to pre-pay 2018 alimony payments in December, 2017. Under the new tax law proposals, alimony payments may not be deductible beginning in 2018. You may also need to contact your divorce attorney to review your divorce decree and identify what changes, if any can be made to your divorce decree as a result of the changes in the tax laws in 2018. It may be advisable to agree to share the additional tax savings for 2017 between the two parties for the 2018 alimony payments made in December, 2017.

In addition, if alimony payments are no longer deductible and alimony received is no longer includible in income, the change in the tax law will penalize the person making the alimony payments in future years and benefit the person receiving the alimony payments. Due to the change in the tax laws, the party paying the alimony may want to consult with their divorce attorney to see if the divorce decree could be amended for the change in the tax consequences to both parties.

#3 – Failure to prepay your 2017 tax return preparation fees by December 31, 2017. Under the new Trump tax law proposals, tax return preparation fees will no longer be tax deductible in 2018. It may also be advisable to pay not only your 2017 tax return preparation fees but also 2018 estimated tax return preparation fees too.

#2 – Failure to maximize your charitable donations in 2017! The new tax laws are expected to lower personal tax rates in 2018. Therefore by paying Charities your expected donations for 2018 through 2020, in 2017, you will save more taxes. However if you do not want to make a large donation to your charities covering future years, it may be advisable to make a significant charitable donation to a Greater Cincinnati Foundation Donor Advised Fund. In doing so, you or your designated family member will be able to direct what payments will be made to what charities in future years out of your Donor advised fund.

Due to the increase in the standard deduction for single persons to $12,000 and married couples to $24,000, individuals may not get a tax benefit from charitable donations in future years. Beginning in 2018, with the changes in itemized deductions, most taxpayers will only get deductions for real estate taxes, mortgage interest and charitable donations.

Mortgage interest on home equity loans will not be tax deductible beginning in 2018.  Taxpayers should pay all interest owed on their home equity loan by 12/31/2017.  Also, they should consider restructuring that debt into a loan that is tax deductible beginning in 2018.

The higher standard deduction may result in many taxpayers not getting a tax benefit from their donations beginning in 2018. Therefore it may be advisable to make a significant donation to your Greater Cincinnati Foundation Donor Advised Fund by the end of December, 2017, to make the donations that you would be making over the next three to five or more years.

#1 – Failure of cash basis taxpayers to prepay 2018 operating expenses in December, 2017 and defer income from 2017 to 2018. The proposed tax law changes will typically result in business owners having lower tax rates in 2018. Therefore by taking deductions in 2017 or deferring income to 2018, business owners will pay less taxes in 2017 when the tax rates are higher. It is advisable to meet with your CPA to review the tax rules for accelerating deductions and deferring income so that your tax savings are protected from IRS challenge.