2018 Year-End Planning Tips

Now that the federal tax overhaul has passed, you might want to talk with your tax advisor about doing a few things before year-end (not much time left).

Prepay State Taxes.

Under Trump Tax, individuals only may deduct $10,000 of state and local taxes per year.  For us in Hawaii, that includes state income tax and real property tax.

If you pay more than that in a year, consider paying some taxes in 2017 so they can be deducted under 2017 rules.  Take, for example, the estimated income tax payment due on January 20th.  If you as an individual can pay it by the end of the year, then it can be deducted in 2017 when you might be able to get a bigger benefit from it.

By the way, this won’t work for 2018 taxes that you pay in 2017.

Prepay Miscellaneous Itemized Deductions.

Many of the miscellaneous itemized deductions — the ones that need to be over 2% of adjusted gross income to count — are going away next year.  If you have some of these, you may want to consider prepaying them this year to get a 2017 benefit.

Some of these deductions include:

  • Tax return preparation fees
  • Investment advisory fees
  • Safe deposit box fees
  • Unreimbursed employee business expenses such as job travel, union dues, job education

Charitable Contributions.

Charitable contributions are made by many people, especially in Hawaii.  It’s one of the most popular itemized deductions.  The number of people who itemize is expected to fall sharply because the standard deduction is going up in a big way.  If you think you’ll stop itemizing, you might want to consider making your 2018 contributions by Dec. 31 so you would be able to deduct what you give to charity.

The move makes tax sense only for people who believe they will have enough deductions to itemize on their 2017 return but not when they file 2018 taxes.  So this is not for everyone.

Mortgage Interest.

Mortgage interest will be deductible in 2018, but there will be new limits on the deduction.  Under the new law, you can deduct interest on no more than $750,000 in mortgage debt, down from the current $1.1 million limit.  People who already own homes, or who had a binding written contract to buy one before the law went into effect, still get the higher limit.

As with the charitable contribution deduction, it may make sense to prepay mortgage interest — the payment due at the end of December but that won’t be late if paid in early January, for example.  Prepayment makes tax sense only for people who believe they will have enough deductions to itemize on their 2017 return but not on the 2018 return.

Defer Income Into 2018.

Because tax rates will be lower in 2018, it might make sense for people who can do so to defer some billings into 2018.  Self-employed individuals, for example, who aren’t in a rush to get their cash in the door might send out some year-end billings into 2018.  Generally, individuals are on the cash basis, meaning that their income is considered to be earned not in the year they billing was sent out, but in the year that the payment was received.  Many larger businesses, in contrast, are on the accrual basis, meaning that their income is considered earned when billed.