Mid-year Tax Moves
By Kristina Drzal Houghton, CPA, MST
Most people don’t include tax planning on their summertime agenda, but maybe they should.
The problem with waiting until the end of the year is that you reduce the time for planning strategies to take effect. If you take the time now to do mid-year tax planning, you’ll still have six months for your actions to make a difference on your 2017 tax return.
In addition, proposed tax reform could be cause for additional changes to your tax plan. Planning now for 2017 taxes not only helps reduce your tax burden, but it can help you gain control of your entire financial situation.
This year may seem especially tricky with the uncertainty of potential changes in the tax laws. This article is going to focus on planning assuming there is no change, since executives, lobbyists and Wall Street analysts increasingly believe the administration — distracted by repeated crises while facing a short and crowded legislative calendar — will be unable to deliver on President Trump’s promise to slash corporate and individual tax rates this year and ignite significantly faster economic growth.
While Hill Republicans argue that ongoing issues related to the current administration will have no impact on tax reform, movement on Capitol Hill has slowed momentum and emboldened Democrats to try to block Republicans’ every move. And Wall Street analysts believe it will help push tax reform into 2018 and perhaps even beyond next year’s midterm elections.
Here are a few things you should consider.
Assess Changes That Affect Your Situation
Have you experienced any life events that can change your tax situation? Here are some examples:
• A job change. If you are eligible for a distribution from your former employer’s retirement-savings plan, consider rolling the money into another tax-favored plan or an individual retirement account (IRA) to avoid the receipt of currently taxable income.
• A home sale. You may exclude profit — within limits — on the sale of your principal residence from your taxable income if you meet the tax law’s requirements.
• A marriage or divorce. File a new W-4 withholding allowance certificate with your employer, or, if you pay quarterly estimated taxes, review the amount you are paying.
• A new child arrives. As a parent, you may be eligible for various tax breaks.
Size Up Deductions and Credits
Use last year’s tax return to estimate what your highest tax bracket will be and how you can reduce your tax liability through deductions and credits. For instance, you might make deductible charitable donations of money or property to reduce your marginal tax rate.
This might be particularly important for 2017 since rates are expected to decrease in the future.
Examine Your Investment Portfolio
You can harvest capital losses from securities sales to offset capital gains plus up to $3,000 of ordinary income each year. You may also use capital gains to offset capital losses from earlier in the year.
Planning your securities activities early will help you prepare for tax time.
Take Retirement Plans into Account
When possible, boost contributions to retirement plans within the generous tax-law limits. You may also be able to supplement your retirement plan at work with contributions to an IRA plan.
On the flip side, you’re generally required to take annual required minimum distributions from retirement plans after reaching age 70½. Keep that in mind if you will reach that milestone this year.
Focus on Higher Education
If you have a child in college, you may be able to claim higher-education credits even if the child graduates this year. However, each credit is phased out for upper-income taxpayers. The tuition deduction expired after 2016, so make sure to plan for the best use of the remaining education tax benefits.
Update Your Estate Plan
Finally, review your estate plan to ensure you’re maximizing tax benefits. Currently, transfers between spouses are completely exempt from estate and gift tax, while other transfers are sheltered by a $5.49 million exemption in 2017 ($10.98 million for a couple).
While estate-tax reform remains a strong possibility, if not in 2017 then in a future year, waiting to plan may not be prudent.
Outside Collection Agencies
While many things in the tax arena remain uncertain at this point, two changes at the IRS have taken effect in 2017 that you should be aware of.
First, the IRS is now using outside collection agencies to collect unpaid tax obligations. This new program will start slowly, with only a few hundred taxpayers receiving mailings. The number will grow into the thousands later in the summer.
Taxpayers who are contacted will first receive several collection notices from the IRS before their accounts are turned over to the private collection agencies. The agency will then send its own letter to the taxpayer informing them that the IRS has transferred the account to the agency.
These agencies are required to identify themselves as working with the IRS in all communications. Unfortunately, a change like this can often lead to confusion among taxpayers, which gives scammers a new opportunity to steal taxpayer dollars. The IRS is aware of the potential fraud problems and plans to continue to help taxpayers avoid confusion.
The IRS reminds taxpayers that private collection companies, like the IRS, will never approach taxpayers in a threatening way, pressure taxpayers for immediate payment, request credit-card information, or request payments in gift cards, prepaid debit cards, or a wire transfer. A legitimate letter from a collection agency associated with the IRS will instruct taxpayers to write a check directly to the IRS.
Correspondence Audits on the Rise
The IRS is now handling many routine audit reviews through form letters called correspondence audits. These letters come from the IRS and ask for clarification and justification of specific deductions on your tax return.
Common issues that trigger a correspondence audit are large charitable deductions, withdrawals from retirement accounts and education-savings plans, excess miscellaneous deductions, and small-business expenses.
Don’t panic if you get one of these audit form letters. The IRS often uses computer programs to compare individual return deductions with the averages for a person’s income level or profession. If you’ve received a letter, you may have simply fallen outside the averages.
As long as you respond promptly, thoroughly, and with good documentation, it won’t necessarily become a contentious issue. The key is to keep proper, well-organized documentation under the assumption you may need it to support your deductions. If you do this right, the correspondence audit will end with a ‘no change’ letter from the IRS, acknowledging you’ve addressed their concerns.
These are just a few possible mid-year tax-planning moves to consider. In between summer picnics and family outings, take the time to review actions that might be beneficial to you at tax time next year. It will be here before you know it.
Kristina Drzal Houghton, CPA, MST is a partner and director of the Taxation Division at Meyers Brothers Kalicka in Holyoke; (413) 536-8510.