Here are some deductions that can reduce your 2017 tax bill
- Even with federal tax reform up in the air, there are steps taxpayers can take now to save come April 2018.
- Consider donating to charity certain assets that have appreciated in value or invest in a local film or television production or solar energy installation to earn a state tax credit.
- Tax-loss harvesting is another popular tactic.
This has been a banner financial year for just about everyone — corporate earnings and stock markets are at all-time records, millions of individuals and small-business owners have experienced strong income gains, and home equity has reached historic highs.
But for many investors, any income gains could be muted by a high tax bill unless they take steps now to minimize their taxes. According to the Federal Reserve Bank of St. Louis, individuals earning between $100,000 and $199,999 annually in fiscal 2016 had an effective or average tax rate of 17 percent. And those earning between $200,000 and $499,000 had an average tax rate of 22 percent.
Many people are aware of the most common ways to reduce their taxable income, such as increasing their 401(k) contributions. If you haven’t made the maximum contribution for 2017 — $24,000 for people 50 and older or $18,000 for anyone under 50 — it’s not too late to do so.
But with the end of year approaching, what other strategies can investors employ? Even with the proposed federal tax law changes pending, here are a few places to start:
1. Donate appreciated stock or other securities to nonprofits. People with investments in stocks, bonds and other securities can donate those that have appreciated in value that they’ve held for at least one year, resulting in significant income-tax savings. In fact, donating stock saves even more taxes than donating cash, since there is no capital gains tax when appreciated securities are given to a nonprofit.
Here’s how this works for people with a federal tax rate of 39 percent and a state tax of 6 percent:
- By making a $10,000 cash donation, they can save $4,500 in taxes.
- However, making a $10,000 donation in stock that has doubled in value saves approximately $6,000 in taxes, including $1,500 in future capital gains taxes.
2. Donate other assets that have appreciated. The IRS also provides tax breaks for people donating other assets, such as certain wines, art and land. I recently met with a couple who purchased a painting five years ago that has likely doubled in value. We plan to track the value, as well as other pieces in their collection, to determine if donating any of them in the future makes financial sense.
3. Buy film and TV production credits. Several states offer tax credits to television and film production companies that make a television series or feature film in that state. These companies may transfer or sell these credits to individuals, which means a person can buy a film tax credit and receive a tax break on their state tax returns.
Here’s an example of how it works: An investor buys a $20,000 credit from the movie studio for $17,500 before December 31, 2017. As a result, the investor is entitled to a $20,000 state tax credit. However, in 2018 the investor will need to report $2,500 in short-term capital gains.
4. Harvest tax losses. Take the opportunity to sell stocks that are worth less than what you paid for them. By realizing or “harvesting” a loss, investors are able to offset taxes on gains from other investments and potentially from other income.
For example, people who invested in January in the SPDR S&P Oil & Gas ETF, believing that oil prices would rebound in 2017, lost money. That particular investment was down about 17.5 percent through mid-October, which means a $40,000 investment made in January is worth $7,000 less today.
Investors in a 45 percent marginal income tax bracket that use this loss to offset other short-term capital gains will save $3,150 in taxes. They will also be able to carry any amount of loss into future years if they are unable to use it fully in 2017.
5. Invest in a low-income-housing credit partnership. These tax credits give incentives to use private equity to develop affordable housing for low-income Americans. The tax credits are attractive because they provide a dollar-for-dollar reduction in a taxpayer’s state income tax.
One business owner I know recently sold her business and learned she owed an extra $100,000 in state income tax. By investing $89,000 in a low-income housing tax credit partnership, she received a $100,000 Georgia low-income housing tax credit, saving her $11,000 in state income taxes. Some tax credit programs treat these savings as a capital gain for federal income taxes, so make certain to discuss any tax ramifications with a certified public accountant before investing in one of these credits.
6. Utilize the federal solar tax credit. Officially called the federal investment tax credit, this subsidy offers solar farm owners a 30 percent tax credit. These credits are available for an investor who holds an interest in a partnership or other companies that own a solar energy system.
For homeowners, there is also a federal tax credit available for installing a residential solar system. Some of my clients have invested in solar systems and taken advantage of this credit, and Congress recently extended the deadline for using this credit to December 2021.
Any decision to utilize a tax credit or deduction should be made as part of an overall financial strategy. But exploring various scenarios now with a tax or financial advisor will pay off when your taxes are due in April 2018.
— By Frederick Wright, partner and wealth advisor with Brightworth