As of today, it’s looking like the tax code will change drastically on Jan 1, representing the largest change to the tax code in 30 years.
A huge impact of the tax change is the reduction of the corporate income tax from 35% to 21%. While important to shareholders of firms (i.e. any investor), this change is not actionable for many of us. Small business owners, however, will have an interesting decision to make come Jan 1. It’s looking like the math is making C-Corps an attractive alternative to S-Corps and Sole Proprietorships going forward.
With that rant aside, there are several actionable steps that normal Joe Schmoes like you and me should consider doing by Dec 31. These changes are governed by most of us losing the ability to itemize. 30% of taxpayers itemize today. 5% will itemize going forward. And those that itemize will have incomes much higher than me. If you fall into my camp (itemize now, not in future), here’s what you should consider doing over the next 2 weeks:
- Make accelerated charitable contribution payments by Dec 31.
- Doing so will effectively give you a discount on your charitable contributions of (federal marginal tax rate + state marginal tax rate). For me, this represents a 40% discount on charitable contributions made by Jan 1.
- If I donate $1 today, it ends up costing me $0.60. If I donate $1 on Jan 1, it ends up costing me $1.
- If you want the tax deduction today but you want the ability to make distributions at a later date, utilize a Donor Advised Fund. Such funds allow you to get the full tax break today, invest the money in stocks/bonds, and distribute to charities at any time in the future. https://www.fidelitycharitable.org/
- If you somehow made a fortune in Bitcoin, Fidelity accepts donations in Bitcoins. It would be a brilliant way of offloading your Bitcoin without realizing any tax penalty.
- Prepay your 2017 property taxes (usually due mid 2018) by Jan 1.
- The same logic from above applies.
- Unfortunately if you pay AMT, this strategy will not work for you.
- Why? If you hit AMT, you get zero benefit from property taxes anyway. Doubling your property taxes does nothing.
If you have the cash, the above moves are absolute no brainers. Doing these simple moves will benefit you roughly $0.20-$0.40 per dollar spent. I can think of few instances in life where I get an immediate 40% return per dollar spent.
Going forward in 2018, the new tax law will change the calculus of prepaying my mortgage early. Why? My mortgage rate is 2.875%, but after considering taxes my effective interest rate paid goes to 1.73%. As of today I’ve been comfortable with the prospect of beating a 1.73% return with my own investments. Going forward, the new after-tax benchmark for me to beat in my investment accounts will be 2.875%.
Disclaimer: consult a tax professional before doing anything crazy. I’m just a spreadsheet monkey typing stuff into a computer. You’d have to be crazy to believe anything I say.