I write about smart tax moves to make every year around this time, but 2017 is a somewhat unique situation. If the GOP is successful in passing a tax reform bill that goes into effect in 2018, there are some especially smart moves taxpayers can make in the final weeks of 2017 in order to take full advantage of the expected changes.
Donate stock (or other appreciated assets) to charity
One of the most obvious year-end tax moves you can make is to donate to charity, which is one of the most common itemized tax deductions. And, many Americans do just that. In fact, December is by far the most active month for charitable giving, with 31% of contributions taking place during the month.
However, you may not be aware that your donations don't necessarily have to be in cash. In fact, there are a couple of big benefits that come with donating stock, or other appreciated assets, instead of cash. Specifically, you get to deduct the entire current market value of the asset, but you don't have to pay a penny in capital gains taxes on the profit.
For example, since bitcoin has been in the news lately, let's say that you bought one bitcoin for $200 a couple of years ago. As I write this, one bitcoin is worth approximately $16,700, so you're sitting on a $16,500 profit. If you were to sell your bitcoin and then donate the money to charity, you'd owe capital gains taxes on this profit, which would likely be a four-figure sum of money that the charity wouldn't receive.
Alternatively, if you donate your bitcoin (or part of it) to your favorite charity, you get to deduct the entire value of your donation, and the charity gets the benefit of the entire market value of the asset. No capital gains tax will have to be paid by either party.
The IRS allows you to deduct donations of appreciated assets of as much as 30% of your adjusted gross income, or AGI. So, if you want to contribute to a cause you're passionate about and lower your tax bill at the same time, this is something to consider before 2018 begins.
If you have any other deductible expenses on the horizon, use them now
While we don't quite know what a final tax reform bill could look like just yet, both proposals on the table involve roughly doubling the standard deduction and eliminating many itemized deductions. The result will be that itemizing deductions will become worthwhile for far fewer Americans. This is another good reason to donate more to charity in 2017, as I've already suggested.
Additionally, if you plan to itemize deductions on your 2017 tax return and there are any potentially deductible purchases you've been thinking about making, or deductible expenses that you could take care of now, it could be a smart idea to make them before the end of the year.
One excellent example that homeowners can take advantage of is to make your January mortgage payment early. You can deduct all of the mortgage interest that you paid during 2017, not just the amounts that were billed. In other words, if you pay your January mortgage payment before the end of December, you could potentially have 13 months of mortgage interest to deduct, not just 12.
Another example is if you have any tax-deductible memberships that you could renew. As a personal example, I contribute to a local nonprofit theater organization, and part of my annual dues are tax-deductible. My membership won't officially expire until February, but I plan to send my check before the end of the year.
Defer some of your income until next year
Since it looks like the marginal tax rates will generally be lower in 2018, as long as a tax reform bill passes, it could work out favorably to defer some of your income until after Dec. 31, if possible.
For example, if you're a business owner, it could be smart to wait to send out invoices to customers until after the first of the year. If you're planning to sell stock at a profit, it could be smart to hold off. Or, if you know you're getting a year-end bonus at work, it could be worth checking if your payroll department is willing to wait for a few weeks to pay it.
Other year-end tax moves
This is by no means a complete list of smart tax moves to make before the end of the year. Rather, these are three not-so-obvious moves that could be especially smart right now, considering the GOP's tax reform efforts.
Just to name a few, it could be a smart idea to increase your 401(k) contributions, sell losing investments to offset your capital gains taxes, and make sure you don't have any money in your FSA that needs to be used.