The Republican overhaul of the US tax code finally became law this month. For many Americans, it raises a couple of questions: First, how will this bill actually affect me? And second, is there anything I should do in these last days of 2017 that can save me money?
Here’s a simple guide, just five questions, to whether you should be rushing to make a financial maneuver, or if you should sit back and enjoy this New Year’s Eve weekend.
If so, you probably don’t need to be reading this article. For the majority of the 70% or so of households who took the standard deduction for the 2016 tax year, the impact of the tax bill is minimal. Assuming nothing major changes about their financial life, their 2017 tax year expenses will be about the same as 2016, and a little lower from 2018 until 2025, after which the lower tax rates that begin next year expire.
However, if you took the standard deduction last year and since then got a significant pay raise, purchased a house, and/or moved to a high-tax state like California, there is a chance you should switch to itemizing your deductions this year, so read on.
If so, you’re part of the population for whom this guide most directly applies. Under the new tax law, the standard deduction will rise from $6,350 for the 2017 tax year to $12,000 in 2018 for individuals, and $12,700 to $24,000 for couples. If you were right on the edge taking the $6,300 deduction in 2016, this might mean you will stop itemizing your taxes moving forward—but not this year.
For instance, let’s say you are a single person who made $100,000 in 2017 and had $10,000 in deductions from things that can be itemized like paying mortgage interest, local taxes, and giving to charity. This year, you should itemize your taxes. For your 2018 taxes, if you had the same income and payment, you probably shouldn’t, because the standard deduction will be higher than $10,000.
Millions of households will be in this situation where they itemize in 2017, but not in 2018. If you are one of them, there are some actions you can take to reduce your tax burden next year. The simplest thing you can do is give more to charity this year, and less next year. Any donation made by December 31, 2017 counts for the 2017 tax year. If you’ve been giving $2,000 to the Special Olympics every year, you might want to give $4,000 in 2017 and none in 2018, because you won’t be able be able to make use of the deduction in the future.
If so, you should consider trying to pay your 2018 property taxes. Today!
The new law caps the popular state and local tax (SALT) deduction at $10,000 and so will hit some people in high-tax states hard. Homeowners in places like New York and California, many of whom pay well over $10,000 in annual property taxes, are rushing to pay for their 2018 property taxes before the end of the year. The Washington Post reports thousands have already done this in Fairfax County, Virginia—one of the wealthiest counties in the US. This led the IRS release an advisory on Dec. 27 that you can only prepay your 2018 property taxes if that tax was already assessed. If you’re a homeowner, check with your local tax office to see if your home has been assessed.
If so, first of all, congratulations on being wealthy. The AMT was designed to prevent the wealthy from deducting their way to paying basically no taxes; of the 4.4 million US households who pay the alternative minimum tax (AMT), the vast majority make more than $200,000 a year.
Second of all, you don’t really need to sweat taking any action before the end of 2017. Households who pay the AMT were already unable to deduct property taxes in previous years. AMT payers are allowed to deduct charitable deductions, but that will make little difference in 2017 and 2018. In other words: just keep paying that AMT.
Maybe. Every dollar you avoid paying is one less that the US government has to provide vital welfare and safety services to its citizens. On the other hand, one could make the argument that it’s actually one less dollar the US government can use to wage unnecessary wars around the world. The ethics of minimizing taxes are complicated, and worth considering.