Plan Now, Save Later: Third Quarter 2017 Tax Tips

Plan Now, Save Later: Third Quarter 2017 Tax Tips

By Richard M. Prinzi, Jr., CPA & Co-Founder F-Sharp Tax Management Services

Want to enjoy the lower taxes promised by the 2018 tax relief act, even if it is not passed? Talk right now is how the economy will grow 3% or more – if the tax relief act is passed – but my analysis confirms what I have been saying for years: Tax relief is in your hands and always has been.

With some simple, year-end planning, you can achieve greater tax savings with or without tax relief, and avoid the rush to file in April.

Hire a CPA

If you are self-employed, you should be scheduling the last of several appointments for the year with your CPA. There are so many options available to you, and tax saving strategies, that not engaging a CPA to assist you with your tax compliance virtually guarantees you are paying too much.

The right tax professional is the most important financial relationship in the self-employed taxpayer’s life, yet is often undervalued because it is more difficult to see money saved, than the refunds received. My self-employed clients are always asking me why their friends (with full-time, salaried jobs) are getting so much money back every year, while they always break even each year. What they don’t see is their friends are likely paying 40% or more of their paycheck into the government all year, just to get 5% back.

 Self-Employed vs Full-Time Employees

For self-employed taxpayers, they could be paying 22% during the year and owing no additional money at year end. So is it better to pay 35% with what’s essentially an “interest free loan” to the government, or paying 22%, with the additional funds in your pocket all year?  What is better in the long run?

For example, if you are making $80,000 per year, and save 13% per year (35%-22%) that’s $10,400 you can invest or put into a retirement account. If you did that for 10 years and saved at a reasonable market return, you would have close to a quarter of a million dollars in the account.

Invest some time to understand the tax system and find a tax preparer that cares about you and makes you part of the process, then the current system will work just fine for you.

For the full-time, salaried employees, who file each year for a refund in April, and think they are doing all they can because they don’t owe at year end, they never realize how much they give away by not working with an engaged tax professional who knows their tax situation well. I have many friends who would notice and speak up if a waiter erroneously adds an extra bottle of wine to the dinner check, but are awkward and uncomfortable asking if their tax preparer considered planning opportunities when drafting their tax return. The latter will be less embarrassing for your significant other (than calling out the waiter on a mistake!) and could save thousands of dollars each year. With an hour of tax planning prior to year-end each year you can enjoy significant savings.


Let’s consider a few examples to motivate you to be more engaged in the process:

Capital Gains – and Losses

Many people are aware of the capital gains tax on stock sales and some mutual funds. I often get questions about at what rate the gains will be taxed, when their financial advisor tells them they made money, but refers them to their tax preparer for the bad news. While the low 15% rate is often referred to, that only applies to long term gains that most basic investors do not usually have. Mutual fund capital gain distributions and personal financial advisors often get paid more by keeping your account active and trading, so they can show you a rate of return this year, which helps them keep your assets under their management rather than taking lower gains this year for long term results.

So, what will planning do for you? If you share an estimate of the gains you expect with your tax preparer before year end, they most likely will advise you to review your portfolio for positions that may have accumulated losses or went worthless during the year. Your broker might be reluctant to close these positions out and hurt their annual rate of return, in fear you may not understand the tax savings are better for you and the losses are already in your portfolio. Some might be in the portfolio for years and predate the current advisor’s engagement. Until the position is sold you cannot write off the loss against your gains. If the gains you might have to pay tax on are $10,000, that could have been offset by losses, it could cost you up to $4,000, depending on your income level for the year.

Itemizing Deductions & Medical Expenses

Another well-established planning tool is trying to bunch money spent on deductible expenses into one tax year. If you itemize deductions or have out-of-pocket medical expenses, this might be useful to you.  With the huge deductibles many have on their health insurance now, it might be the first year you have enough of these expenses to bring you tax savings.

How this works: if you have a large amount of medical expenses already paid in 2017, it might be good for you to pay bills and prepay for some services before year end. Not to say you should spend money you would not have to pay in the beginning of 2018 anyway, but for services that might not be covered such as dental, eye exams or any medical expenses you have to pay now, that insurance denied quite possibly for the first time in your life. If you pay these expense on a credit card, and pay the card off early in the new year, the interest you pay will be nothing compared to the savings. This technique is especially useful if you already had a one-time medical expense or a huge dental bill this year. The medical expenses paid will be high enough to exceed the threshold and deliver tax savings.

Make the best of a bad situation. The only thing worse than paying the excessive expenses: Getting no deduction for them.  If a doctor offered you 40% off your out-of-pocket medical expense, you would wait all day to see him.  With less of your time, you could get the government to cover a portion.

The same theory applies to itemized deductions, especially unreimbursed business expenses and miscellaneous deductions that are limited to amounts that exceed certain thresholds.

Spend Now – Just in Case …

Another consideration unique to 2017 is to consider aggressively spending on items that might not be deductible in 2018, if the proposed tax reform is passed.

These decisions are riskier in some sense, as you would not only have to find opportunities that work for you, but also correctly predict the change that actually becomes law. Most of the items discussed do not make the final law, and almost none make it in the form being discussed.

An example would be if the new tax reform eliminates the deduction for real estate tax in 2018, you can prepay a portion at year end in 2017. It could be as simple as paying in December rather than in January.

There are many more but they would require a careful cost benefit analysis before implementing. This might be the year to buy that new computer or other business equipment utilized in a home office, or ordinary and necessary for you to maintain your current employment, or prepay for the required continuing professional educations credits you might be required to spend.

Plan for Your “Golden Years” – Tax Break Now

With all the tax savings just discovered with your year-end planning, maybe you should consider increasing your retirement savings. It might not be the most fun, but it can make a real difference in your life. For some it could be as simple as getting an idea what your tax refund will be this year in November/December and using the extra money to make an additional contribution to your 401(k). This is especially useful if you are not even contributing the max employer-matched amount.

For the taxpayers without access to a 401(k) plan, an IRA can replace the benefit, depending on your income level. A small increase in the amounts you save now can compound over time to be a difference maker in your retirement years. How smart will you feel if you are enjoying those funds later, knowing it only took a little time in your 30’s or 40’s to seek out tax advice from a trusted qualified source?

Some taxpayers can not only save additional money for retirement but gain huge tax savings in the process. For the self-employed or joint filers who have both a W-2 employee and a self-employed spouse, these are often missed opportunities. There are so many new products available such as, solo 401(k) plans and the traditional SEP plans, but it is beyond the scope of this article to explain them all.

More importantly, since all but one will most likely apply to you, it would just be unnecessary. What you need to know is that when you take advantage of retirement savings, you can often deduct the full amount. If you are in a high-earning year in 2017, you should consider taking some savings when you are paying taxes. At 44%, those savings will compound and grow over time. If you have a down year, when your income is taxed at a 25% tax rate or less, the 10% penalty you would incur for removing the funds would still be a better solution.

In short, a little time invested before the holiday season begins could be better spent than waiting on line at the post office on April 15th.  Plan well, pay less.

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