March 29, 2018
This year, Tax Day for individuals, sole proprietors and C corporations is Tuesday, April 17. You still have time to consider some moves in 2018 to potentially save federal (and possibly state) income taxes for 2017. Here are three last-minute planning ideas.
1. Choose to Deduct State and Local Sales Taxes
Individuals have the option to deduct either 1) state and local income taxes, or 2) state and local general sales taxes. In other words, if you live in a state with low or no personal income tax or if you owe little or nothing to the state tax collector, you can elect to deduct state and local sales taxes in lieu of state and local income taxes.
If you choose the sales tax option, your tax preparer will use an IRS-provided table to calculate your sales tax deduction. That table bases your deduction on your:
- Personal and dependent exemptions, and
- State of residence.
However, if you kept receipts from your 2017 purchases, you can add up the actual sales tax amounts paid and deduct the total — if that gives you a bigger write-off.
Even if you use the IRS table, you can add on actual sales tax amounts from major purchases, including motor vehicles (including motorcycles, off-road vehicles and RVs), boats, aircraft and home improvements. In other words, you can deduct actual sales taxes for these major purchases on top of the predetermined amount from the IRS table.
2. Make a Deductible IRA Contribution
If you’ve not yet made a deductible traditional IRA contribution for the 2017 tax year, you can do so between now and the tax filing deadline of April 17, 2018, and claim the write-off on your 2017 return. You can potentially make a deductible contribution of up to $5,500 (or $6,500 if you were age 50 or older as of December 31, 2017). If you’re married, your spouse can potentially do the same, thereby doubling your write-off.
There are three ground rules for deductible IRAs. First, you must have enough 2017 earned income (from jobs, self-employment or alimony received) to equal or exceed your IRA contributions for the 2017 tax year. If you’re married, either spouse (or both) can provide the necessary earned income. Second, you can’t make a deductible contribution if you were 70½ or older as of December 31, 2017.
Finally, deductible IRA contributions are phased out (reduced or eliminated) if last year’s income was too high. Fortunately, the phaseout ranges have increased in recent years. Here are the phaseout ranges for 2017:
- If you’re single and were covered by a retirement plan in 2017 (whether an employer-sponsored plan or a self-employed plan), your eligibility to make a deductible contribution for last year is phased out between adjusted gross income (AGI) of $62,000 and $72,000.
- If you’re single and weren’t covered by a plan, your eligibility to make a deductible contribution isn’t affected by your AGI. You can make a fully deductible contribution up to the applicable limit, assuming you have enough earned income.
- If you’re married and both you and your spouse were covered by retirement plans in 2017, the eligibility of you and your spouse to make a deductible contribution for last year is phased out between joint AGI of $99,000 and $119,000.
- If you’re married and only one spouse was covered by a retirement plan, the covered spouse’s eligibility to make a deductible contribution for last year is phased out between joint AGI of $99,000 and $119,000. The noncovered spouse’s eligibility is phased out between AGI of $186,000 and $196,000.
- If neither you nor your spouse were covered by a plan, your eligibility to make a deductible contribution isn’t affected by your AGI. You and your spouse can both make fully deductible contributions up to the applicable limit, assuming you have enough earned income.
For example, let’s suppose you’re a married individual in the 25% federal bracket. Making a $5,500 deductible IRA contribution between now and April 17 would reduce your federal income tax bill by $1,375 (plus any state income tax savings). If you and your spouse were both over 50 as of December 31, 2017, two $6,500 deductible IRA contributions (a total of $13,000 in deductible IRA contributions) would reduce your federal income tax bill by $3,250 (plus any state income tax savings).
3. Establish a SEP
If you operate a small business and you don’t have a tax-favored retirement plan, you might consider setting up a simplified employee pension (SEP). Unlike other types of small business retirement plans, a SEP can be created in the current year and generate a deduction on last year’s tax return. In fact, if you’re self-employed and extend your 2017 return, you have until October 15, 2018, to submit the paperwork and make a deductible contribution for last year.
How much can you contribute to a SEP? Your deductible contribution can be up to 20% of your 2017 self-employment income or up to 25% of your 2017 salary if you work for your own business. The absolute maximum amount you can contribute for the 2017 tax year is $54,000. So, the tax savings can potentially be substantial.
For example, let’s suppose you’re self-employed and in the 28% federal tax bracket. If you make a $30,000 deductible SEP contribution on April 1, 2018, you could lower your 2017 federal income tax bill by $8,400 (plus any state income tax savings). In fact, the tax savings could finance a big chunk of your contribution.
Important: You may not want to establish a SEP if your business has employees. Why? IRS rules generally require you to make contributions to their accounts. If you have employees, discuss the pros and cons with your financial and legal advisors before setting up a SEP.
Ready, Set, File
The federal income tax deadline for individuals, sole proprietors and C corporations is almost here. If you haven’t yet filed (or extended) your 2017 return, it’s time to stop procrastinating and contact your tax advisor. Nobody likes taxes, but your CPA can help soften your tax hit with these and other planning moves.
Last-Minute Section 179 Option for Businesses
Did your business make improvements to real property in 2017? If so, you might qualify for a special Section 179 deduction.
The Sec. 179 deduction privilege often allows eligible businesses to deduct the entire cost of depreciable asset additions in the year they’re placed in service. For 2017, the limit is $510,000. However, this break is phased out dollar-for-dollar for qualifying purchases over $2.03 million in 2017. So, no Sec. 179 deduction is available if your total investment in qualifying property was above $2.54 million for 2017.
Traditionally, real property improvement costs have been ineligible for the Sec. 179 deduction privilege. However, there’s an exception for qualified real property improvements placed in service in tax years beginning in 2017 for:
- Interiors of leased nonresidential buildings,
- Restaurant buildings, and
- Interiors of retail buildings.
Consult your tax advisor if your business made improvements that you think might qualify for this special break.