If you're age 70 ½ or older you probably know you must begin taking distributions from your IRA -whether you want to or not. The IRS life expectancy tables determine your required minimum distribution (RMD) based on the previous years ending balance for your IRA and your attained age for the tax year.
The qualified charitable distribution rules provide those subject to RMDs an option that can help them reduce their income tax liability by having certain charitable contributions made directly to a qualified charity. Given the changes to itemized deductions and the standard deduction in the 2017 tax law update, the qualified charitable distribution rules for your IRA account becomes even more important.
If you make charitable contributions throughout the year, it would be wise to consider making those contributions directly from your IRA. Up to $100,000 of charitable distributions from each IRA owner's accounts can be excluded from your taxable income each year.
Say you plan to give $10,000 to your church or another qualified charity and you are receiving taxable distributions from your IRA. If you make the contribution to the charity directly from your IRA, your $10.000 gift will not be reported as income on your income tax return.
If you instead receive these funds as income from your IRA distribution and then send the same $10,000 to the charity it is included in your taxable income and could result in higher Medicare premiums and a higher percentage of your social security income being taxable. If you do not have itemized deductions that exceed the new $24,000 per couple or $12,000 per individual standard deduction, you could lose all the tax benefits of your generosity.
By having the distributions sent directly to the qualified charity from your IRA, you will exclude the amount from your taxable income, potentially lowering your Medicare premiums, the taxable portion of your social security benefits, and your overall income tax rate at both the federal and state level.
If you follow this strategy, be sure to let your income tax preparer know. There is no indicator on the 1099R you receive at the end of the year that shows that part of your distribution is non-taxable, so there is a chance many people using this strategy are over-paying their income taxes each year.
The holidays may be on your mind now, but taking steps to reduce your income tax bill for 2017 could make for a merrier April. If you wait until the start of the New Year to think about income taxes, you will be too late. To help us understand the steps we should be considering, we enlisted the help of Myrtle Beach CPA Bart Buie.
With the proposed changes to deductibility of state and local income taxes it makes sense to accelerate the current year deduction. That means you should make your estimated tax payments In December of 2017 rather than waiting until January of 2018. You may even want to purposely over pay your state income taxes this month to get a bigger deduction when you file in 2018. Don’t worry if you overpay you will get that refunded to you in April of 2018.
Business owners should be doing a pro forma income tax calculation now to be sure they are minimizing their taxes. With rates purportedly going down in 2018, it makes sense to push as much income as possible into the new year. That means any billing should be delayed to the end of the month, if possible, so that the receipt will post to your books in 2018. Also, business owners should be looking to pay all the bills they have incurred in calendar year 2017 before December 31, even if they are not due until January of 2018. This will reduce 2017 taxable income by increasing expenses for the year.
Bart also talks about purchasing equipment needed for your business now. He offers an example of purchasing a work vehicle in December to qualify for a 2017 deduction, even though your payment may not begin until 2018.
December is also the last month to establish 401(k) and solo 401(k) plans to save on 2017 income taxes. Bart points out that an S-Corp with one employee can establish a plan before year end and the business owner can then make a salary deferral contribution in 2017; with the company match being made by their tax filing deadline in 2018. Because an S-Corp is a pass-through entity, the matching contribution will still lower your income tax bill for 2017.
Bart also encourages clients to accelerate charitable donations. If you have planned giving, you can go ahead and make the contribution to reduce your tax liability.
Don’t forget to look for chances to offset any realized capital gains with any capital losses available. You can use losses to offset 100% of any gains you claim plus $3,000 of other taxable income. There is talk of eliminating your ability to designate which lot of stock you sell in the future, so now would be a good time to review your accounts for places where the FIFO accounting method might be a negative for you. Be careful not to run afoul of the thirty-day wash sale rule as you implement this strategy.
With the end of the year approaching now is the time to look for opportunities to save on income taxes. Here are some items you should look for.