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.
Make deductible retirement contributions in 2017 rather than later if your 2017 rate is higher. (This retirement funding decision can wait until tax filing time, as that flexibility is built into the law.)
Recipients of pass-through business income almost certainly will want the pass-through business to do whatever it can between now and year end to shift income from 2017 into 2018 because of the highly favored treatment such income will receive beginning next year.
Decisions on charitable contributions and Minnesota income tax payments are further complicated by the radical increase in the standard deduction from 2017 to 2018, and by the limitation on state and local tax deductibility, which will be $10,000 in 2018.
The standard deduction will increase from $6,350 to $12,000 for single filers, $9,350 to $18,000 for heads of household, and $12,700 to $24,000 for married joint filers. This means that taxpayers with itemized deductions less than the foregoing amounts in 2018 will be better off taking the standard deduction than itemizing deductions.
Thus, in addition to checking your likely marginal tax bracket for each year, you should consider whether or not you will be itemizing deductions or just taking the standard deduction in 2018.
On charitable deductions, it may make sense for those with financial flexibility to make contributions this month that they ordinarily would not make until 2018 or even later. The financial advantage is obvious if one’s marginal rate will be dropping.
The same advice applies, even for those facing a marginal rate increase, if one’s total itemized deductions in 2018 are likely to be less than the standard deduction. For that will mean that there is no federal income tax benefit whatsoever to making charitable contributions after 2017.
On Minnesota income taxes, taxpayers who pay estimated tax should be sure to provide amply for their 2017 Minnesota income tax by making a payment by year’s end. This applies both to taxpayers who generally pay more than the new $10,000 limit on deductibility of state and local taxes that will apply in 2018 — and to those who will no longer itemize because their total itemized deductions will be less than their new standard deduction.
Aggressive taxpayers might try to game the system by deliberately overpaying their Minnesota income taxes or prepaying health insurance premiums before year’s end. But prepayment of liabilities probably is not technically allowable as a deduction for cash method taxpayers.
The bottom line for almost all individual income taxpayers is to forget about what you think of the federal law changes and drill down on whether there is anything you can do to benefit yourself financially right now as a result of the tax law overhaul.
John P. James is an attorney who was Minnesota’s commissioner of revenue from 1987 to 1991 under Gov. Rudy Perpich.