2017 Year End Tax Planning – Last Minute Tax Tips

Although the House passed a tax bill, it still has to pass the Senate and be signed by the President in order for it to become law.

Although the House passed a tax bill, it still has to pass the Senate and be signed by the President in order for it to become law.


Wow, it’s hard to believe that 2017 is almost over!  The House has passed a new tax plan and the Senate is working on passing a different one.  I hate giving tax advice on tax proposals that haven’t been signed into law yet.  A bill has to pass the House, and the Senate, and be signed by the President before it’s actually a law.  If you need a refresher on just how that happens check this out:  School House Rock – I’m Just a Bill


So while there’s no guarantee that there will be a new tax law, if the current House proposal were to pass– many people could lose the ability to itemize their deductions in the future.


If you currently itemize your deductions, these tips are for you.  The idea is that you move as many of your normal deductions onto your 2017 tax return as possible.  This is a pretty normal strategy for people even when there is no threat of a tax law change.  Save on taxes now over saving on taxes later.  People do it all the time.  But with the potential for losing out on these deductions completely, it becomes a little more urgent.


The Deductions You Want to Push Forward:


State and Local Income Taxes.  If you already make estimated tax payments, you might have noticed that your 4th quarter payment isn’t due until January 15th of 2018.  But if you pay on January 15th – although the payment will apply to your 2017 state taxes, you won’t get to deduct it on your federal taxes until 2018.  But state income taxes might not be deductible in 2018!  So here’s a little trick:  move that payment up to December 31 or earlier – then you can deduct it on your 2017 taxes instead.  If Congress eliminates that state and local income tax deduction you still got your deduction.  If they don’t eliminate it – you just got it early.


But you don’t have to be an estimated tax payer to make this work for you.  If you know that you normally owe state income taxes, but you don’t normally make estimated payments, you can still make a 4th quarter estimated tax payment this year.  Pay in advance!  Let’s say you normally owe Missouri $200 at tax time.  It hasn’t been enough for you to bother with estimated tax payments.  That doesn’t mean you’re not allowed to do it!  If you know you;re going to owe, go ahead and make a 4th quarter estimated tax payment before the year is over so you don’t lose the deduction.


The same goes for your City taxes.  My office is in the St Louis area, many of my clients have to pay City of St Louis earnings tax.  Most wage earners just have the tax withheld from their paychecks and there is no balance due at the end.  But some people do have to pay that tax every year!  St Louis will let you pay in advance!  If you expect to owe, this is a good year to give the city her money early.


Charitable Donations.  Charitable donations are still going to be deductible under the new tax law, but with the loss of the state income tax deduction and the doubling of the standard deduction, many people will be claiming the standard deduction instead of itemizing in the future.  If you think you’ll be moving to the standard deduction, you might want to bump up your charitable giving this year instead of next year.


For example:  one of the charities I like, I donate to them with a monthly debit to my checking account.  For me, it’s easier to give a little every month rather than one lump sum.  But – it might make sense for me to give a lump sum before the year ends instead, that way I can claim the deduction in 2017 since I might not be able to claim it in 2018.


Mortgage Interest Payment.  Once again, if your house cost less than $500,000, you should still be able to deduct your mortgage interest payment under the new tax law.  But, like with the charitable donations, you might not be itemizing with the increased standard deduction.  It may make sense for you to make your January 2018 mortgage payment early so that you can claim it on your 2017 tax return.


Employee Business Expenses.  This is one of those deductions that appears to be on the chopping block.  If you have a job where you claim employee business expenses, you may wish to stock up on your office supplies and pre-pay some of your subscriptions and licensing fees if you can.


As I said before, I don’t know for certain what the final tax legislation will be.  If the current proposal passes, these tips will help you save some deductions that you would lose next year.  If nothing happens, the worst  is that you took your deductions in 2017 instead of 2018, and that’s not such a bad thing.


Can I Write Off My Child Support Payments on my Taxes?

Divorce and Children

Drawing/Photo by o5com on Flickr.com

Quick answer:  No.


For a longer answer, you may want to know why.  Here’s the reasoning:  if you are married and living with your family and raising your children—there’s no deduction for paying for their school clothes or feeding them.  That’s pretty much what your child support payments are—feeding the kids and paying for clothes.  So whether you live with your kids, or live apart, the money that’s used for those day to day necessities is not a tax deductible expense.    You don’t get a deduction for paying it and your ex doesn’t claim it as taxable income.


What about alimony?  Alimony is different—you get to deduct alimony on your tax return if you pay it, and your ex has to claim the alimony as income.  Alimony counts as income so your ex will have to pay taxes on it. Alimony does not count as earned income for the earned income tax credit, but as one of my clients explained to me, “Oh, honey—trust me I EARNED it!”


You might be thinking that paying alimony is better than paying child support—but there’s a catch to that thinking.  If the “alimony” ends when the kids turn 18— the IRS will call it child support anyway so you lose all the tax advantages.  Alimony basically goes for the life of your ex or until a re-marriage occurs.   So while alimony has some tax advantages—child support at least has an end date.  (There are some cases where alimony is only paid for a limited time, but it has to be very separate and distinct from any type of child support to be valid for tax purposes.)


Some people pay both alimony and child support.  In a case like that you can deduct the alimony portion of your payment on your tax return.  Now it’s important to know—if you fall behind on your payments—the IRS assumes that you pay the child support first.  For example:  Let say you pay $300 a month in child support and $200 a month in alimony.  For the year you pay $6000 all together:  $3,600 in child support and $2,400 in alimony.  You’ll take a $2,400 deduction for the alimony on your tax return.


Now, what happens if you lost your job and didn’t make any payments in November and December of the tax year?  You would have paid $5,000 total, right?  ($500 times 10 months)  And $2,000 of that was for alimony.  But according to the IRS—you pay the child support first.  So of the $5,000 that you did pay, $3,600 went towards the child support and you only get to deduct $1,400 (the amount that’s left) for the alimony.  So make sure that you’re all paid up before the end of the year if you want to deduct all of the alimony on your tax return.


If your hungry for more, try http://www.mentalfloss.com/blogs/archives/135170 to put icing on the cake.

Missouri Seniors May Want to File Separately

If you’re married and receiving a public pension or social security in Missouri, it may make sense for you to file your tax return as married filing separately instead of jointly.  It sort of defies the conventional wisdom of tax preparation, but it’s worth checking out.

Usually, as in 99.5% of the time, a married couple is better off filing a joint return, at least as far as their federal tax return is concerned.  But often times, especially when there are no dependents claimed on the return, the difference is negligible if anything.   It’s just natural to file a tax return jointly because it’s easier and usually cost effective.  But most tax software programs that do a “married filing jointly (MFJ) vs married filing separately (MFS)” comparison analysis usually don’t include the state results in the analysis. 

If you live in Missouri, and you both have a public pension, you’ll want to take a closer look at the potential difference.  Here’s why:  If you’re married and your combined income exceeds $100,000, your public pension exemption becomes limited.  If you change your status to MFS, you each are allowed income of $85,000 before any limitations kick in.    The higher your income, the more you’re going to want to consider splitting your return.  Now remember, this works for public pensions and social security, if you have a private pension, the rules are different and there’s no tax benefit to filing separately.

Public pensions are pensions from government organizations such as the military, the postal service, or state or local governments.  Teacher pensions are considered to be public pensions.  Private pensions are from corporations like Boeing or Nestle.  If you’re not sure what kind of pension you have, call your plan administrator. 

Let’s say for example that you and your wife are retired school teachers–meaning that you both have public pensions.  Your income is $70,000 and your wifes’ is $74,000.  Combined, you’re well above the $100,000 limitation.  Because you’ve exceeded the income limitation, your pension exemption is limited to $23,406.  If you filed separately, the income limitation would be $85,000–which you’d both be under, and you’d each get a pension exemption for $33,703 (or a total of $67,406.)  That’s a difference of $44,000!  Compute that out at the 6% tax rate for Missouri and you’ll have saved $2,610. 

That’s a big difference.  Using the standard “MFJ vs MFS” calculator for the federal return, I showed that with the married filing separately status, you’d owe an extra $12.  I’ll gladly pay $12 to save $2600.  But without doing the extra work, I wouldn’t have known there was that huge difference.

While the take home tax software products are really good, this is one of those situations where you can miss out on a major tax savings.  You have to know about the public pension exemption.  You have to know about the different income limitations.  And most importantly, you have to actively set up and do the work to make sure you don’t miss this opportunity.  If you think you might be missing out on important deductions like this one, maybe it’s time to set up an appointment with a professional.