INDIVIDUALStax planning

2017 YEAR-END

guide for

year in review

2017 is unlike any previous tax year. Major congressional tax reform proposalsthat generally would go into effect in 2018 if signed into law are creating an auraof unprecedented uncertainty.

Plan with these proposals in mind and remember this important tradeoff:Proposed legislation would generally

The income tax base (the amount of income subject to tax) could go upbecause under the proposed legislation many tax breaks would be reduced oreliminated. If that happens, some people could wind up owing the same (orhigher) tax liabilities next year.

There are many differences between the House and Senate bills that need tobe reconciled before any tax reform legislation can be signed into law. As aresult, many of the details that you need to assess your tax situation for 2017and 2018 remain unclear, including:

• When tax reforms might go into effect,• What the 2018 tax brackets will be, and• The extent to which certain deductions and credits might be reduced or

eliminated.

Answering these unknowns is critical in deciding

2017 Year-End Tax Planning Guidefor Individuals

when to recognize income

and incur deductible expenses

reduce tax rates

increase the income tax base

In many cases, individuals will decide to postpone recognizing certain incomeitems until next year (when tax rates might be lower). Before year end, manypeople will also consider

to take advantage of today’s tax breaks — especially those that would bereduced or eliminated under tax reform proposals.

year in review

Additionally, proposed tax law changes could possibly eliminate estate andgeneration-skipping taxes and/or significantly increase the lifetime gift andestate tax exemption. So, it’s important to review your estate plan before yearend.

Our tax team doesn’t have a crystal ball. For now, we’re advising our clients toplan based on the current tax law. However, we’re following tax, legislative andregulatory proposals, and we’ll continue to let you know when major changeshappen.

2017 Year-End Tax Planning Guidefor Individuals

accelerating deductible expenses making additional charitable donations purchasing or selling investments

year in review

Here’s a brief summary of tax planning opportunities for you to considerbefore year end, as well as links to relevant blogs we’ve posted in 2017 thatprovide more details on recent developments.

“As we go to press with this guide, there is stillmuch uncertainty in tax law reform. Now morethan ever, tax planning is critical to help reduceyour overall income and estate taxburden. Planning the timing of income receiptsand deductions, where possible, can havesignificant benefits, especially for expenses thatmay no longer be deductible in future years.”

- Laura Yalanis, CPA/MST- Shareholder, KLR Tax Services Group

2017 Year-End Tax Planning Guidefor Individuals

taxes on income

When tax planning at year end, focus on your “marginal” rate. That’s the rateyou’ll pay on your next dollar of income. Your marginal rate depends on yourincome and your filing status.

Regular income tax rates apply to ordinary income. This includes: wages, self-employment or business income, short-term capital gains, nonqualified dividends,interest and, generally, distributions from tax-deferred retirement accounts.

What Tax Rate Will You Payon Your 2017 Income?

2017 Regular Individual Income Tax Rates

2017 Thresholds for the 39.6% Rate

Single Head of Household Married Married Filing Separately

$418,401 $444,551 $470,701 $235,351

2017 Year-End Tax Planning Guidefor Individuals

taxes on income

Alternative Minimum Tax (AMT)

If you’re subject to the AMT, your tax rate may be lower . . .

26% or 28%. . . but more of your income will be taxed because certain income items aretreated differently, such as:

• Incentive stock option exercises• Accelerated depreciation adjustments and related gains• Tax-exempt interest on certain private-activity municipal bonds

And certain deductions aren’t allowed, such as:

• State and local income tax• Property tax• Home equity debt interest not used to improve your home• Some miscellaneous itemized deductions

You must pay the AMT if your AMT liability is higher than your regular income tax liability.

2017 Year-End Tax Planning Guidefor Individuals

taxes on income

2017 Year-End Tax Planning Guidefor Individuals

Individual tax rates are a major difference between the current House and Senatetax reform bills. Although tax rates would be lower for most individuals, sometaxpayers could be in a higher tax bracket next year if tax legislation is enacted.

In addition, the Senate bill would lower taxes only temporarily. In 2025, today’s taxrates and brackets would apply again, though the brackets would be adjustedbased on inflation.

The House bill would eliminate the confusing AMT, starting in 2018. However, theSenate version retains the AMT but increases the exemption amounts andphaseout thresholds, so fewer taxpayers would be subject to the AMT. Undereither proposal, many high-income taxpayers would pay less federal income taxin the future.

Another major provision would substantially increase the standard deduction.

Plus, taxpayers generally qualify for a $4,050 exemption for themselves and eachof their dependents for 2017 (though an income-based phaseout applies).

Starting in 2018, personal and dependent exemptions would be eliminated underthe proposed legislation — although child tax credits would be increased andsubject to higher phaseout amounts.

If the standard deduction increases, many taxpayers who previously itemizeddeductions would simply take the standard deduction in the future. But,remember, no tax reform has been signed into law as of this writing.

Single Married

$6,350 $12,700

2017 Standard Deduction2018 Proposed Standard Deduction

with Inflation Adjustments

Single Married

$12,200 $24,400

How Will Tax ReformAffect You?

timing issues

The timing of when you recognize income, or incur deductible expenses, can have abig impact on your tax bill. Typically it’s beneficial, to the extent possible, to deferincome to the next year and accelerate expenses to the current year. This reducesyour current year’s tax bill.

But if you expect to be in a higher tax bracket next year — or tax rates to increase —then it’s generally better to do the opposite: accelerate income and deferdeductions.

Timing strategies can also help you avoid the AMT in 2017 — or they could trigger itif you’re not careful.

What Should You Accelerate (or Defer) This Year?

2017 Year-End Tax Planning Guidefor Individuals

Common Timing Strategies

Income Items• Bonuses• Self-employment income• Retirement plan distributions• U.S. Treasury bill income

Expenses• Charitable contributions• State and local income taxes• Property taxes• Mortgage interest

2017 Year-End Tax Planning Guidefor Individuals

Timing issues are especially critical in the face of proposed tax reforms. If enacted, theproposals would reduce or eliminate many itemized deductions and other tax breaks,starting as early as 2018. If that happens, maximizing these tax benefits in 2017 couldlower your tax bill this year, without increasing your 2018 tax liability. In addition, theproposals are expected to lower tax rates for most individuals starting in 2018. If thosechanges are enacted, tax breaks taken today would generally be more valuable thantax breaks deferred until next year.

timing issues

Adjusted Gross Income (AGI)-Based Reduction on Itemized Deductions

If your AGI exceeds certain limits, your itemized deductions will be reduced for2017. (Exceptions: deductions for investment interest, medical expenses andcasualty, theft and wagering losses.) The size of the reduction depends on theextent to which your income exceeds the threshold.

80% is the maximum reduction in your deductions.

If you’re close to the threshold, deferring income might help you stay under itand protect your deductions. If you’re above the threshold but might not benext year, you may be better off deferring deductible expenses. But, beware,many itemized deductions would be reduced or eliminated undercongressional tax reform proposals. If that happens, you would lose out on anydeferred amounts of the repealed deductions.

On the plus side, the AGI-based reduction would also be eliminated underproposed tax reform legislation.

AGI - Threshold for 2017 Itemized Deductions

Single Head of Household Married Married Filing Separately

$261,500 $287,650 $313,800 $156,900

2017 Year-End Tax Planning Guidefor Individuals

tax breaks for homeowners

Under the current tax law, the biggest itemized deductions for many taxpayers arefor home-related expenses.

Mortgage Interest and Property Tax Deductions

Beware: Interest on home equity debt not used to improve your home isn’tdeductible for AMT purposes.

You can also deduct 100% of the property tax you pay on all of your homesfor 2017 (unless you’re subject to the AMT, under which state and local taxes likeproperty tax aren’t deductible).

Are You Turning Big Expensesinto Big Tax Savings?

2017 Year-End Tax Planning Guidefor Individuals

$1 million is the limit on the mortgage debt on which youcan deduct interest on your principal residence and secondhome (combined) for 2017.

$100,000 is the limit on the home equity debt on which youcan deduct interest for 2017 regardless of how you used thedebt.

Proposed tax reform legislation would significantly scale backtax breaks for homeowners starting in 2018. Possible cutbackscould reduce or eliminate deductions for mortgage interest,interest on home equity debt, and property taxes. However, notax reform legislation has been signed into law as of this writing.

Nevertheless, before December 31, it may be advantageous to prepay yourJanuary mortgage and property tax bills due in early 2018 to maximize youritemized deductions for 2017.

tax breaks for homeowners

Home Office Deduction

If you use part of your home exclusively for business, you may be able to deductactual expenses allocable to the space, including some that otherwise wouldn’t bedeductible, such as utilities and depreciation.

Are You Turning Big Expensesinto Big Tax Savings?

2017 Year-End Tax Planning Guidefor Individuals

Or you can use a simplified calculation of $5 persquare foot up to a $1,500 maximum.

If you moved for work or business reasons, you may be eligibleto deduct your moving expenses for 2017. If you moved to anew state it’s also important to familiarize yourself with the taxlaws in your new home state and understand the requirementsfor filing a multistate tax return in 2017.

Moving Expense Deduction

Proposed legislation would repeal the home office deduction (except for the self-employed), the exclusion of employer-reimbursed moving costs from income and,generally, the deduction for unreimbursed moving expenses starting in 2018.However, no tax reform legislation has been signed into law as of this writing.

tax breaks for homeowners

Gain Exclusion on Home Sales

If you sold your principal residence in 2017, you may be able to exclude from yourtaxable income all (or part) of the gain.

Various tests must be met to qualify for this break, and gain that’s attributable to aperiod of “nonqualified” use of the home may be subject to capital gains tax. Anygain that isn’t covered by the exclusion might be subject to the net investmentincome tax (NIIT) in addition to capital gains tax.

If you’re planning to sell a second home, consider making it your principalresidence for a period long enough to qualify for the exclusion. Or, if it’s a rentalproperty and the sale is likely to generate a significant gain, consider a like-kindexchange.

2017 Year-End Tax Planning Guidefor Individuals

Maximum Gain Exclusion

For 2018 and beyond, the required holding period for the homesale gain exclusion would be longer under proposed taxreform legislation. Additional restrictions would apply.However, no tax reform legislation has been signed into law asof this writing.

Single Head of Household Married Married Filing Separately

$250,000 $250,000 $500,000 $250,000

tax breaks for medical expenses

Health care costs are on the rise, causing many employers to cut back on health-care benefits. In 2017, many taxpayers are paying more out-of-pocket formedical expenses than in previous years, often because premiums haveincreased and/or their plans have higher deductibles and co-payments.Fortunately, various tax breaks can help take the bite out of these increases.

Medical Expense Deductions for 2017

“Bunching” these expenses into alternating years may get you past the thresholdand maximize your tax savings.

Are You Using Tax Breaks to Combat Rising Health Care Costs?

2017 Year-End Tax Planning Guidefor Individuals

of AGI is the threshold for deducting medicalexpenses for most taxpayers10%

Under the House bill, the itemized deductions for medical expenses would beeliminated starting in 2018. But under the Senate bill, the deduction would beretained and the AGI threshold would drop to 7.5% for 2017 and 2018. Although notax reform legislation has been signed into law as of this writing, considermaximizing elective medical spending in 2017, because this tax break might notbe available next year.

tax breaks for medical expenses

Health Savings Accounts (HSAs) and Health Care FlexibleSpending Accounts (FSAs)

Exceeding the AGI threshold for the medical expense deduction can bechallenging for many taxpayers. Fortunately, HSAs and FSAs allow you to makepretax contributions and are used for tax-free funding of qualified medicalexpenses.

2017 Year-End Tax Planning Guidefor Individuals

Self Employed?

Instead of making contributions to employer-provided HSAs and FSAs, self-employed taxpayers who pay their own medical and dental insurance premiumscan generally deduct those costs “above the line.” This can lower AGI, making iteasier for the self-employed to exceed the AGI threshold for the medicalexpense deduction for 2017.

Uninsured? Under the Affordable Care Act, for 2017, taxpayers without healthinsurance face penalties equal to the greater of: 2.5% of their income, or $695per adult + $347.50 per child. The maximum penalty is $2,085. Legislation hasbeen proposed that would repeal the individual mandate. However, no taxreform legislation has been signed into law as of this writing.

Additional rules andlimits apply to theseaccounts.

$3,400

$6,750

$1,000

$2,600

2017 Contribution Limits

*

*

charitable deductions

If you’re charitably inclined, charitable giving can be one of the most powerful toolsin your tax planning toolbox — and this tax break is expected to survivecongressional tax reform efforts and even possibly be expanded.

You have complete control over when and how much you give.

But the charitable deduction is subject to an AGI-based reduction if your AGIexceeds the applicable threshold. And your annual deduction for qualifiedcharitable donations is limited to 50% of your AGI. Lower limits may apply to certaindonations. Beware of these limits and donation deadlines as you consider year-endcharitable giving for 2017.

In addition, if proposed changes cause you to take the standard deduction (ratherthan itemize deductions), you could lose out on this tax break starting in 2018.However, no tax reform legislation has been signed into law as of this writing.

Is Charitable Giving an Important Part of Your Tax Planning?

2017 Year-End Tax Planning Guidefor Individuals

and other donation-related breaks

of a donation to aqualified charity isgenerally deductible.

100%

Substantiation Requirements

For your donations to be deductible, you must properlysubstantiate them. Requirements depend on the type andamount of donation.

Two Donation-Related Breaks to Consider for 2017

1. Donate Appreciated Securities Rather Than Cash

Giving away publicly traded appreciated stock you’ve held more than one yearoffers a double tax benefit:

But don’t donate stock that has lost value. You’ll enjoy a bigger tax benefit byselling the stock, recognizing the loss and donating the proceeds.

charitable deductions

2. Qualified Charitable Contributions from IRAs

A rollover can help fulfill your required minimum distribution, and it’s especiallybeneficial if the 50% of AGI limit would reduce your charitable deduction.

When you make a qualified charitable distribution from your IRA, the income isexcludable from AGI. The donation is not deductible on Schedule A. This can yieldbetter tax results, especially for those who are subject to AGI-based reductions onitemized deductions, which include charitable donations.

2017 Year-End Tax Planning Guidefor Individuals

and other donation-related breaks

$100,000 is the maximumamount you can transferfrom your IRAs directly toqualified charities tax-free ifyou’re age 70½ or older.

$100,000

You can deduct the full fair market value of the stock.

You avoid the capital gains tax you’d owe if you sold the stock.

1.

2.

If your net capital losses exceed net capital gains, you’re limited in how much lossyou can deduct per year against ordinary income. The limits on deducting capitallosses against ordinary income for 2017 are:

Loss carryovers can be a valuable tax saving tool. But they disappear once ataxpayer dies.

tax planning for investments

Tax planning for investments is a top priority for many individuals. Of course, thereare many nontax factors you should consider before making investment decisions.But, timing gains and losses on sales can help minimize taxes for 2017.

15% is generally the long-term capital gains tax rate, but your rate is 20% if you’rein the 39.6% ordinary income tax bracket.

Short-term capital gains (gains on investments held for 12 months or less) andtaxable interest income are taxed at ordinary income tax rates as high as 39.6%.You also may owe 3.8% NIIT.

Are Taxes Taking Too Big a Bite Out of Your Returns?

2017 Year-End Tax Planning Guidefor Individuals

Taxes on Capital Gains

for most taxpayers

for married taxpayers who file separately

$1,500$3,000

2017 Top Rate, Including NIIT

Short-term gain 43.4%

Most long-term gain 23.8%

Long-term gain on collectibles, such as artwork and antiques

31.8%

Long-term gain attributable to certain recapture of prior depreciation on real property

28.8%

tax planning for investments

Passive Activities

Do you materially participate in the businesses you’re invested in? If not, beware ofthe passive activity rules. In general, losses from passive activities can only betaken against passive activity income. Unused passive losses can be carriedforward until you earn other passive income or you sell an investment.

Income from these types of activities involves some different considerations andplanning strategies.

Qualified Small Business Stock (QSBS)

The QSBS was acquired on or after September 28, 2010.

The QSBS was held for more than five years.

To qualify as QSBS, the stock generally must have been issued by a C corporationthat doesn’t own assets worth more than $50 million and that’s in an active trade orbusiness. Additional rules apply.

Qualified vs. Nonqualified Dividends

Dividends are an important part of your return on investment. But not all dividendsare created equal for tax purposes. There are two types of ordinary dividends:

Nonqualified dividends are taxed at ordinary income rates.

Qualified dividends are taxed at the more favorable long-term capital gains rates.

2017 Year-End Tax Planning Guidefor Individuals

1.

2.

of the gain from the sale or exchange of QSBS is tax-free, as long as:100%

tax planning for investments

Stock-Based Executive Compensation

Many high net worth taxpayers earn stock-based executive compensation,including:

• Incentive stock options (ISOs)• Nonqualified stock options (NQSOs)• Restricted stock

Special rules apply to stock-based compensation. Year-end planning can help youdecide whether to exercise options and/or sell stock.

2017 Year-End Tax Planning Guidefor Individuals

education planning

Parents and grandparents worry about rising college costs. The College Boardestimates that the annual cost for living on campus and attending a four-yearuniversity for 2016-2017 ranged from:

Fortunately, you can contribute money to various college savings programs.Contributions aren’t deductible for federal tax purposes, but earnings accumulatetax-free if you follow the rules.

Are You Taking Full Advantage of Tax-Advantaged Funding Options?

2017 Year-End Tax Planning Guidefor Individuals

$20,090 for an in-state public university

$45,370 for a private university

College Savings Programs

529 PlansCoverdell Education Savings

Accounts

Annual Contribution

Limits?

No, but you might owe gift tax on contributions over the $14,000 annual

exclusion.

Subject to annual income limits, and only $2,000 can be contributed per

child per year.

Tax on Withdrawals?

No, if the money is used to pay for qualified

college-related expenses.

No, if the money is used to pay for qualified education expenses,

including primary and secondary school expenses.

education planning

2017 Year-End Tax Planning Guidefor Individuals

Deduction for Qualified Higher Education Costs

Under the House bill, the current structure of higher educationcredits would change. The Lifetime Learning credit would beeliminated, and the American Opportunity credit would beexpanded by adding a 5th year with half the benefits. However, thischange would make higher education tax credits unavailable topart-time students.

Education-Related Credits and Deductions

The tax code also offers several tax breaks for higher education spending for youand your immediate family members. These breaks may be reduced oreliminated based on your modified adjusted gross income (MAGI).

2017 Tax Credits and Phaseouts for Higher Education Costs

American Opportunity Lifetime Learning

Annual Credit

100% of the first $2,000 of education expenses; 25% of

expenses between $2,000 and $4,000; maximum credit $2,500

per student

20% of the first $10,000 of qualified education expenses; maximum credit $2,000 per tax

return

MAGI PhaseoutRange for Joint

Filers$160,000-$180,000 $112,000-$132,000

MAGI PhaseoutRange for Other

Filers$80,000-$90,000 $56,000-$66,000

Other Notable Rules

Only for the first 4 years of higher education costs

For higher education costs during or beyond

the first 4 years

retirement planning

Traditional Retirement Accounts

Employees may be eligible to make pretax contributions to various employer-sponsored retirement plans. Plus, these contributions can reduce your AGI andMAGI, which are the triggers for certain taxes and can cause the benefit of certaintax breaks to be reduced or eliminated. But there are limits to your annualcontributions.

2017 Year-End Tax Planning Guidefor Individuals

Have You Maximized Your Contributions and Minimized Your Taxes?

Employees without retirement benefits and the self-employed: Consider atraditional IRA.

In addition to contribution limits, the deduction for traditional IRA contributions isphased out if your MAGI exceeds certain levels. Traditional retirement accountsgrow tax-deferred until withdrawn. So making the maximum contributionallowed by law is typically a good idea.

2017 Limits for 401(k), 403(b) and 457 Plans

Elective deferrals for people under age 50 at year end $18,000

Elective deferrals for people age 50 or older at year end $24,000

Defined contribution plan limit $54,000

2017 Contribution Limits for Traditional IRAs

People under age 50 at year end $5,500

People age 50 or over at year end $6,500

retirement planning

2017 Year-End Tax Planning Guidefor Individuals

Roth Accounts

Contribute after-tax dollars to a Roth account now…

…and take tax-free withdrawals later as long as your withdrawals are “qualified.”

In 2017, the contribution limits are the same for traditional and Roth IRAs. (The limitsapply on a combined basis, however.) Unfortunately, income-based limits mayprevent higher-income taxpayers from contributing. If you’re above the phaseoutlimit, consider a “back door” Roth IRA. A back door Roth IRA allows you to getaround income limits by converting a traditional IRA into a Roth IRA.

Retirement Plan Withdrawals

You could owe penalties for withdrawing too soon or too little, depending on yourage. Withdrawals are taxed at ordinary income tax — not long-term capital gains —rates. Plus, they could push you into a higher tax bracket and/or increase yourMAGI enough to trigger the NIIT on some or all of your investment income.(Retirement plan withdrawals themselves aren’t subject to the NIIT.)

planning across generations

“Shifting” income to children or grandchildren in a lower income tax bracketsaves your family taxes as a whole. Specifically, consider transferring appreciatedor income-producing assets to them before year end, so that tax on any gains (if anasset is sold) or income generated is subject to their rate — which might be as lowas 0%.

Kiddie Tax

Income shifting across generations works only for gifts to adults. “Kiddie tax” rulesgenerally apply to:

$2,100 is the threshold at which unearned “kiddie” income begins to be taxed atthe parents’ marginal rate for 2017.

Annual Gift Exclusion

$14,000 is the gift tax annual exclusion per recipient and donor for 2017. (Theannual exclusion will increase to $15,000 in 2018.) Leverage your exclusions evenfurther with gifts to a Section 529 education savings plan or Coverdell EducationSavings Account.

Can You Save Taxes by Transferring Assets to Family Members in 2017?

2017 Year-End Tax Planning Guidefor Individuals

18 24Children under age Full-time students under age

+

Gift, estate and generation-skipping transfer (GST) tax law wouldchange significantly under proposed tax reform legislation. As ofthis writing, the House and Senate bills differ significantly in termsof the limits, timing and duration of the proposed changes. Ingeneral, if proposed legislation is enacted, many wealthyindividuals would see their family’s potential gift, estate and GSTtax liability drop significantly.

KLR is one of New England’s premier accounting and business advisoryfirms. With 250+ team members and offices in Boston, Newport, Providence,Shanghai and Waltham, KLR provides a wide range of services to bothindividuals and businesses.

Find out why KLR is so much more than an accounting firm atKahnLitwin.com.

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December 31 is an important tax deadline that you might not be aware of: Witha few exceptions, it’s the date by which most of your tax planning strategiesmust be implemented to reduce your 2017 tax bill.

Contact our tax team to set up a meeting to brainstorm financial planningstrategies to help you succeed in the future — and minimize your taxobligations for 2017.

With the possibility of major tax law changes pending, some tax breaks coulddisappear in 2018 or 2019. So, meeting with us before year end could beespecially critical this year, depending on your business tax situation.