Year-End Tax Planning for Individuals

Manage income and deductions to lower your 2017 taxes


  • Review your investment portfolio to realize losses on stock while maintaining your investment position.


  • Postpone income until 2018 and accelerate deductions into 2017 to lower your 2017 tax bill. This strategy may be especially valuable based upon Congress’ tax reform legislation which hopes to lower tax rates in exchange for the reduction or elimination of various itemized deductions. Note, however, that in certain cases (e.g., when you have an unfavorable change in filing status next year), it may be worthwhile to accelerate income into 2017.


  • Postpone potential bonuses that you may receive from your employer. If you regularly receive a bonus or anticipate one this year, it may be beneficial to discuss with your employer if you could postpone the bonus until early in 2018.


  • Consider using a credit card to accelerate deductible. Doing so may increase your ability to claim deductions in 2017 and the actual payment will not occur until you pay your credit card bill in 2018. Note, this strategy may not work in every instance and will depend upon the balance and interest rate associated with the credit card.


  • Increase your state and local tax deductions from your paycheck or make an additional estimated tax payments in December. If you expect to owe state and local income taxes when you file your return next year, consider asking your employer to increase withholding of state and local taxes or pay additional estimated tax payments of state and local taxes before year-end to increase the deduction for State taxes in 2017, provided you are not going to be subject to alternative minimum tax (AMT) in 2017. Congress’ tax reform package is considering the elimination of deductions for state and local taxes beginning next year so you could lose the deduction completely if you wait to make the payments until next year.


  • Consider the potential for the AMT related to any year-end planning actions. Many tax breaks allowed for purposes of calculating regular taxes are disallowed for AMT purposes, such as the deduction for state property and income taxes, miscellaneous itemized deductions, and personal exemption deductions. Therefore, if you may be subject to the AMT for 2017, these types of deductions should not be accelerated.


Additional taxes on individuals with higher incomes in 2017 


  • Individuals with high incomes in 2017 may be subject to the 3.8% surtax. A 3.8% surtax is assessed on the lesser of: (1) net investment income (“NII”), or (2) the excess of modified adjusted gross income (MAGI) over a threshold amount ($250,000 for joint filers or surviving spouses, $125,000 for a married individual filing a separate return, and $200,000 in any other case). Taxpayers who may find themselves subject to this tax should (a) consider ways to minimize additional NII for the balance of the year, (b) reduce MAGI other than NII, and (c) consider ways to minimize both NII and other types of MAGI.


  • Individuals with high incomes in 2017 may be subject to the 0.9% additional Medicare tax. The 0.9% additional Medicare tax applies to individuals for whom the sum of their wages received with respect to employment and their self-employment income is in excess of an unindexed threshold amount ($250,000 for joint filers, $125,000 for married couples filing separately, and $200,000 in any other case). Employers must withhold the additional Medicare tax from wages in excess of $200,000 regardless of filing status or other income and self-employed persons must take it into account in figuring estimated tax.


Maximize the tax benefits of retirement accounts


  • Weigh the benefits of converting your traditional IRA to a Roth IRA. If you currently have a traditional IRA and believe a Roth IRA is better than a traditional IRA, consider converting traditional-IRA money positions that are invested in beaten-down stocks (or mutual funds) into a Roth IRA if eligible to do so to take advantage of the future tax free appreciation of such holdings. Keep in mind, however, that such a conversion will increase your AGI for 2017.


  • Consider converting back to a traditional IRA before the end of the year if you converted to a Roth IRA in 2017. If you converted assets in a traditional IRA to a Roth IRA earlier in the year and the assets in the Roth IRA account declined in value, you could wind up paying a higher tax than is necessary if you leave things as is. You can back out of the transaction by recharacterizing the conversion-that is, by transferring the converted amount (plus earnings, or minus losses) from the Roth IRA back to a traditional IRA via a trustee-to-trustee transfer. You can later reconvert to a Roth IRA.


  • Take an eligible rollover distribution from a qualified retirement plan before the end of 2017 if you may incur a penalty for the underpayment of estimated tax and increasing the withholding from your employer is not an option. Income tax will be withheld from the distribution and will be applied toward the taxes owed for 2017. You can then timely roll over the gross amount of the distribution, i.e., the net amount you received plus the amount of withheld tax, to a traditional IRA. No part of the distribution will be includible in income for 2017, but the withheld tax will be applied pro rata over the full 2017 tax year to reduce previous underpayments of estimated tax.


  • Take required minimum distributions (RMDs) from your IRA or 401(k) plan (or other employer-sponsored retirement plan). RMDs from IRAs must begin by April 1 of the year following the year you reach age 70-½. That start date also applies to company plans, but non-5% company owners who continue working may defer RMDs until April 1 following the year they retire. Failure to take a required withdrawal can result in a penalty of 50% of the amount of the RMD not withdrawn. Although RMDs must begin no later than April 1 following the year in which the IRA owner attains age 70-½, the first distribution calendar year is the year in which the IRA owner attains age 70-½. Thus, if you turn age 70-½ in 2017, you can delay the first required distribution to 2018, but if you do, you will have to take a double distribution in 2018-the amount required for 2017 plus the amount required for 2018. Think twice before delaying 2017 distributions to 2018, as bunching income into 2018 might push you into a higher tax bracket or have a detrimental impact on various income tax deductions that are reduced at higher income levels. However, it could be beneficial to take both distributions in 2018 if you will be in a substantially lower bracket that year.


Gifts & Estate Taxes


  • Make gifts sheltered by the annual gift tax exclusion before the end of the year and thereby save gift and estate taxes. You are allowed to exclude gifts of up to $14,000 made in 2017 to each individual and unused exclusions do not carry over from one year to the next. Such transfers may save family income taxes where income-earning property is given to family members in lower income tax brackets who are not subject to the kiddie tax.