Personal Finances - 2017

Tax Preparation for this Year

By Mo Vidwans

With the new Administration in place and both houses of Congress in political alignment with each other and the administration, it is expected that there could be changes to the tax laws before the end of the year. It is not clear how far and how extensive the changes would be and hence nobody knows, at this time, what the impact would be on the middle class families. But it is assumed that we will not be worse off compared to what we have now (if we remembered to follow all the rhetoric of the campaign). It also remains to be seen what the implementation date would be.

Last month we focused on preparation for 2016, what paperwork we need and in particular how to go about getting ready for filing the 2016 taxes.

So let us focus more on preparation for 2017 and beyond since, as I mentioned in the last article, it is an all-year endeavor and, always, the sooner we get started the better it is.

Unless Congress revives laws

In 2017 seniors are losing the 7.5% threshold for medical expenses in itemized deduction. Seniors may not have realized it, especially if they were using tax software to prepare their taxes that for medical expenses they were given a special 7.5% deduction, as against those who are not yet 65 had to contend with 10% deduction, before they can use all their medical expenses. It was a major advantage for seniors and at the moment it is history. My suggestion, for this and all other changes that may be forthcoming and not beneficial for us, is that the citizens write to their Congressman and the two Senators and let them know what you do not like; after all never forget that they are representing you.

We cannot claim more than $3,000 for capital losses to reduce income in any one year but the losses are carried forward indefinitely. This means that every year you can claim the losses if you still have any, up to $3,000, until you exhaust the losses. Nobody likes to have such losses but let me just say that when we are dealing with stock/bond market such miscalculations are inevitable. We are all human after all.

Foreign taxes paid, generally on dividends coming from foreign companies that you may own, are there in your 1099 statements and sometimes ignored because we don't know what to do with it. In fact it is one of the biggest tax advantage we have because they reduce our taxes directly dollar for every tax dollar. No paperwork required up to a limit, just claim them on line 48 of your 1040.

Energy credits have been dwindling slowly over the past few years and are supposed to disappear completely in 2017 and beyond. Claim what you can in 2016 and, as mentioned above, let your representatives know your displeasure.

No paperwork (1099s etc.) does not mean you don't have to show that income; actually it is far from it. Assume IRS knows all about it and show it sincerely. Miscellaneous income (jury duty, gambling winnings) needs to be shown too; some income of the educational scholarships can be taxable.

If you have donated goods to charity organizations keeping proper receipts and a list of what is donated is important. If you are donating cash then the check is your receipt. All unreimbursed business expenses can be claimed in the Itemized deductions; just have the back-up material ready to support the deduction.

Credits against the taxes are always better than the deductions against the income. There are many credits available that you can take advantage of. The foreign tax credit mentioned above is just one of them. Some credits are non-refundable meaning that they can work only against the taxes that you actually owe. If you don't owe taxes then these credits would not work. Childcare, education, retirement savings credit are some of them. There are others but they are more obscure. All of these have income limits. Earned income credit is one of those which you can get even if you don't owe taxes.

Tax planning for future years

Tax planning is critical at any age but it takes different forms. In our thirties and forties we are going after maximum deductions like IRAs for all earning members of the family, HSAs for health needs, Itemized deductions and many others. When we get to the age between 60 and 70 then it morphs in a different way. After 59.5 of our age we can withdraw from an IRA and not get penalized even though we still have to pay income taxes on it. At the age of 70.5 we must withdraw from our IRAs a specific amount (it depends on the total value of your IRA at the end of the previous year) dictated by IRS every year otherwise we get penalized 50% of what we should have withdrawn. So this period in between 60 and 70 is to be watched carefully. Here is why. It happens more often than we think but when we delay withdrawing from IRA and reach 70.5 and must withdraw a dictated amount, which is usually substantial, it can easily push us into the higher income tax bracket; which means more taxes and it can push us into higher Medicare bracket too which is even more detrimental. We do get the IRA money grow a bit longer in those 10 years but then the double whammy hits us.

Managing the IRA withdrawals over those ten years (between the age of 60 and 70) so that we stay within our income tax and Medicare bracket is critical. It is easier to manage this if we start thinking about it earlier. It is like averaging the withdrawal of our IRA funds over the 10 years to keep our income leveled. This consideration is overlooked by many and then we end up paying more taxes than we need to.

I welcome any questions on this article or the previous ones, also the suggestions for any future financial subjects of your interest that you would like to know more about.