Opinions and emotions are running hot on the federal tax law changes enacted this week. It is important to put them aside for now and just push your pencil — to see whether there is anything there that you can use to your financial advantage in 2017.
Who should do this? Every taxpayer with any financial flexibility at all surrounding the amounts and timing — 2017 vs. 2018 — of income, retirement contributions, charitable contributions or Minnesota income tax payments, and with likely taxable income of more than $9,525 if single, $13,600 if head of household or $19,050 if a married joint filer.
The new tax law is massively complex, so other circumstances may warrant similar attention.
Why should people do this? Because the marginal federal income tax rates are changing, and often are a good bit higher in 2017 than they will be in 2018 at various taxable income levels. A rate that is 3 percentage points higher in 2017 than it will be in 2018 is typical, but far from universal, so taxpayers need to consult the 2017 and 2018 rate bracket tables and think about what they expect in each year and the extent, if any, to which other changes in their economic circumstances and the tax law are likely to affect them.
The biggest advantage is for married joint filers with taxable incomes from $237,950 to $315,000. Their marginal rate drops from 33 percent in 2017 to 24 percent in 2018. But for some others, the marginal rate will be higher in 2018 than in 2017 — joint filers with taxable incomes from $400,000 to $424,950; heads of household with taxable incomes from $51,800 to $51,850 or $157,500 to $424,950; and single filers with taxable incomes from $157,500 to $195,450 or $200,000 to $424,950.
Other than those ranges, the marginal rate will be no higher — and in the vast majority of situations will be lower — in 2018 than in 2017.
What might taxpayers do? Postpone receipt of income until 2018 if your marginal rate will drop, and accelerate receipt into 2017 if you're in the rare situation of an increasing marginal rate.
On deductions, the advice is the opposite — take more deductions in 2017 than in 2018 if your 2017 marginal rate is higher than your 2018 rate, or do the opposite if your marginal rate will increase.