Mo Vidwans
What? Did I not just file my taxes? Yes, you did but that was for last year. This preparation is now for the year that is about to end, 2017. As much as we do wish to never look at it again, the tax season it is here and is not going away any time soon. It has been bugging us for more than 100 years now (since 1913 when the final laws were passed for the first time and since changed numerous times over the century). The sad thing is that once the year is over, you cannot take too many actions that will help you reduce your taxes for 2017 and hence it is much easier to start working on it now while you still have the right calendar year. Needless to say, working on reducing the taxes is a yearlong effort and not something you do just at the last minute.
But nothing is lost yet.
You all have heard of the turmoil and bickering going on inside the beltway. Initially, the White House made a proposal for changes in the tax laws that were one page (one side) long, then they came out, a few months later, with more details about that initial proposal which was several pages; now they have the final bill on the floor. Rest assured that when/if the Congress (and eventually the regulators) will be done with it in the near future, it will likely be a thousand pages.
I hear sound bites about how the new tax laws, in whatever shape and form they get passed, will help the middle class (we will not worry about the businesses right now). From what I have seen and heard that may not be the case. But it is not law yet; much water needs to flow over the dam and the fat lady has to sing. We will have to wait and see. It will be helpful if you would write/call/email/text/tweet to your congressman and the senators to let them know your feelings and thoughts. Do it as often as you can.
Here is what is proposed for the middle class: Standard deduction for all will double. That is good news but that is about the only good news.
Hidden in the footnotes they also say that the personal exemption that is allowed for every member of the family and the dependents will be taken away. In effect, especially for a large family, it more than neutralizes the effect of raising the standard deduction.
Those taxpayers who itemize (schedule A) there is more bad news. There are five key sections for taking deductions namely, 1) medical expenses (over and above 10% of AGI), 2) taxes we pay (state, local, city, real estate, personal), 3) mortgage interest, 4) gifts to charity and 5) losses and miscellaneous deductions. Out of these, it seems that the proposal keeps only limited mortgage interest, some property taxes and gifts to charity, nothing else will be allowed.
Reducing so much from the Itemized deduction form is a serious blow to the middle class and I have this feeling that the taxpayers will not be too happy about that. There are roughly between 44 and 50 million taxpayers who go for such deductions.
What is mentioned above is what we know today; I am sure it will change considerably in scope and content and nobody can predict at this time what direction it may take. It is not certain when it will become law but the estimates are that it may not happen before the New Year.
In the meanwhile, what should we be doing?
Even with such colossal amount of uncertainty looming, the answer is very simple. We need to take full advantage of the current laws, within the legal limits, while doing taxes for 2017 and not wait for the new laws to set-in for 2018. Essentially try to bring, as much as possible, all the expenses in the Itemized form into 2017. IRS does allow us this up to a point. I will explain.
If your property taxes are due in the first part of January, for example, you can pay those in December before the year is over; same thing goes for city and local taxes. All the medical expenses you paid this year regardless when the service was provided can be included. If you pay by check the day you mail or deliver the check is the date of payment. If you use a credit card include the medical expenses charged to your credit card in the year the charge is made not when you actually pay the amount charged.
Medical premiums can be paid a bit earlier than usual if they can be paid in 2017. Dental and eye appointments and regular medical check-ups can be pulled forward. Be careful with Medicare appointments since some of those are time dependent and cannot be pulled forward.
All the donations and gifts to charities can certainly be done sooner to allow us to show them in 2017. Not all but many business-related expenses like membership dues, uniforms, work-related tools etc. can be incurred in November and December as well.
Mortgage payments can be done ahead of time as well, for a month or two.
While we concentrated on Itemized deductions above, we should also be looking at the form 1040. Maximizing traditional contributions to IRA for 2017, alimony paid, expenses for business income, educator expenses, maximizing HSAs, and student loan interest deductions as well as tuition fees and other college deductions should not be ignored. Some of the items mentioned above may disappear in the new law. So, it is best to get going and have your plans ready before the New Year arrives.
We haven’t talked about the actual tax brackets but in the new proposal those who fall into the 12 to 25% bracket may end up paying more taxes. There is also talk about reducing the max limit on 401K deductions from the standard 18,000 to around $2,400 or so; not good for middle class. Stay tuned.
