Relying on the Rental Real Estate QBI Safe Harbor

In response to a recent question we wrote this article to clarify some elements relevant to many of our clients who have rental real estate in their investment and business portfolios.

2017’s Tax Cuts and Jobs Act amended the Internal Revenue Code in many ways, including a provision for a “qualified business income” (QBI) deduction.  This article discusses the availability of this deduction.

Applying this deduction to the case of taxpayers with personally-owned rental property was challenging and the IRS created a “safe harbor” allowing taxpayers to have a tool upon which they can rely in making claim to this deduction.  The safe harbor applies to “rental real estate enterprises” which are discussed below.  In order to rely on it, the response to all of the following questions must be “yes.”

  • Is the property held in a “rental real estate enterprise?”
    • Is the property “held to generate rental or lease income?”
    • Is the property an “interest in a single property or interests in multiple properties?”
    • Does the taxpayer personally own or own the property(ies) in question through a disregarded entity (Example:  A single member LLC)?
  • Does the taxpayer keep separate accounting books and records that reflect income and expenses for each rental real estate enterprise? Note that we assist clients with these requirements.
  • 250 Hours:  For rental real estate enterprises that have been in existence less than four years, did the taxpayer spend 250 or more hours performing rental services in the year of the deduction?  Note that an IRS auditor will request records of this time spent in the event of an audit.  For other properties (beyond the four years), was 250 hours documented in at least three of the past five years?
  • Does the taxpayer maintain contemporaneous (not created after the fact) records, including time reports, logs, or similar documents, regarding the following:  Hours of all services performed; description of all services performed; dates on which such services were performed; and who performed the services?  Note that we recommend our clients use a mobile app to document these requirements.
  • Is the taxpayer willing to attach a statement to the taxpayer’s return filed for the tax year in question that the taxpayer is relying on the safe harbor?

If the responses to the preceding questions are all “yes,” an interest in a rental or rentals can be treated as a single trade or business for purposes of this deduction.  We want to note that even if the safe harbor does not apply because one of the questions above has a “no” response, the QBI deduction may still be available through the 199A provisions themselves.  Using this approach may increase audit risk and involve additional documentation burdens.  The preceding link provides a wealth of information on QBI in general.

This information is provided for discussion purposes only and does not constitute tax advice.  Readers should discuss their specific situations with us or another qualified tax professional.

Moving to the DC/MD/VA (DMV) Area

Mainly for Foreign Service clients:  When being reassigned to the “mother ship” (aka “Main State” for the State Department FSOs), don’t forget to get a local driver license, to reregister your vehicles, and to submit local withholding forms.

Using a Virginia residency as an example, Virginia requires you to obtain a Virginia driver license when you are going to be present in the state for extended “TDY” or “PCS.”  The Virginia DMV website states:  “Within 60 days of moving here, you must obtain a Virginia driver’s license.”  This is not optional and should not be confused with uniformed service member exemptions of the “SCRA.”  We’ve heard of several examples when the “lesser included offenses” of not having taken care of these details exploded a small fine into a large one.

Here are the vehicle-related requirements starting with the 30 day requirement to have it titled in Virginia: Vehicle Titling and Registration.

The District of Columbia and Maryland have similar (but not exactly the same so consult with their sites here – DC and here – MD) provisions so you’ll want to check your understanding.

Don’t forget to submit an updated withholding form for local taxation.  It’s likely you’ll file part year resident in the year of arrival and year of departure though for some the requirement for filing nonresident is triggered by circumstances instead.  Virginia’s form is located here.  You can fill it out and scan/email it to the Charleston pay office.  DC’s form is here while MD’s form is here.

If you prepare your own taxes, make sure to only include state “source income” as your W2 amounts may or may not be correct depending on when the change went into effect.

We have other articles covering some of the details of taxation including residency versus domicile issues.

These comments do not constitute tax advice and are offered for discussion only. Consult with a us or other qualified tax professionals to discuss your specific situation.

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Foreign Earned Income for Foreign Service Spouses

Summary:  We’re noticing a lot of claims for foreign earned income for spouses of foreign affairs and defense agency employees, some of which may place the taxpayers at increased audit risk.  The case law here is unclear and but some claims have been disallowed.  We recommend taxpayers proceed carefully with the exemption.

The related credit for foreign taxes paid is much less controversial as it is based on clearly established fact:  The income was earned overseas and taxed by the host country.  This credit reduces tax due to the U.S. government dollar-for-dollar.  If the host country is a high or medium tax rate country, this credit may yield a greater relief for the taxpayer than the foreign earned income exclusion (FEIE).

Many foreign affairs and national security agency personnel who have accompanying spouses are tempted to claim foreign earned income for their spouses’ income when the spouses aren’t employed by a U.S. government agency.  It’s clear to most taxpayers in this situation that in cases of U.S. government employment, the FEIE is not available to either the taxpayer or the spouse.

Among the common references are the self-prepared tax software interviews (like TurboTax) and the American Foreign Service Association (AFSA) tax guide.  The software interviews gloss over the significance of establishing a “tax home” in the host country as does the AFSA guide.  Here is the AFSA text discussing the FEIE:

Foreign Earned Income Exclusion

The Tax Cuts and Jobs Act of 2017 did not change the laws governing the FEIE. As such, taxpayers living and working overseas may be eligible for this exclusion, but not if they are employees of the U.S. government. In 2018, the first $103,900 earned overseas as a (non-USG) employee or self-employed person may be exempt from income taxes but not self-employment taxes.

To receive this exclusion the taxpayer must:

(1) Establish a tax home in a foreign country, which is the general area of the taxpayer’s “main place of business, employment or post of duty.” (In other words, where the taxpayer is “permanently or indefinitely engaged to work as an employee or self-employed individual.”) and

(2) Either (a) meet the “bona-fide residence” test, which requires that the taxpayer has been a bona-fide resident of a foreign country for an uninterrupted period that includes an entire tax year, or (b) meet the “physical presence” test, which requires the taxpayer to be present in a foreign country for at least 330 full (midnight-to-midnight) days during any 12-month.

Our advice in these cases is to think about claiming the exemption very carefully.  Why?  While it is easy to meet one of the two “step two” tests (bona-fide or physical presence), they fail to qualify for the FEIE in the first step, the establishment of a tax home.  Let’s focus on the language AFSA provided:  “permanently or indefinitely engaged.”  Family member assignments are fixed-term and temporary unless taxpayers can demonstrate that the spouse does not intend to accompany the U.S. government employee as s/he moves through the series of temporary and fixed-term assignments that constitute a foreign service career.  Of additional significance is that the U.S. employee maintains domicile in the USA in one of the states, DC, or territories, and the tax court will need compelling evidence that the spouse is not a member of the same household and intends to remain in the host country or otherwise overseas, unrelated to the U.S. employee’s temporary assignment.  The facts that the spouse is in the host country on U.S. orders, living in U.S. funded housing, and with household goods and family members that were transported at U.S. government expense may be compelling to the tax court.  The facts that the spouse has not established residency in the host country due to diplomatic status, entry on a diplomatic visa in a U.S. government diplomatic passport are also likely to be problematic.  Additionally, the tax court is the only legal venue in which the burden of proof lies on the defendant.

Can these defects be overcome?  Certainly.  For a relatively airtight case, the spouse needs to demonstrate that her/his presence in the host country is not tied to the temporary U.S. assignment of her/his spouse.  There are many ways to do this, but they are rare unless the intention of the spouse really is to establish a tax home in the foreign country.  We’ve seen a few examples of this, particularly later in foreign service careers where the spouse really is establishing a tax home to which the U.S. government employee intends to return once s/he retires.  In those cases, the spouse intends to stay in the host country when the U.S. employee departs for the next assignment.  Provisions exist for residing in housing not provided by the U.S. government and other easy-to-show actions (residency permits most notably and frequently coordinated by the employer in the host country).

The intent of the FEIE is to allow U.S. taxpayers who have established tax homes overseas to exclude income upon which they are paying local taxes as part of living in their new, non-U.S., abodes.  In these cases, U.S. taxpayers should always examine the foreign tax credit at the same time to see which provides them the greater benefit — both cannot be claimed simultaneously.

If the foreign earned income was subject to host country taxation and the taxpayer is electing the FEIE rather than the lesser foreign tax credit, this strengthens the taxpayer’s claim.  This is because the spouse clearly has a tax home in the host country.

In a series of cases, the tax court found that DOD contractors working overseas were not eligible for the FEIE.  In response, Congress added a specific provision qualifying them for the FEIE by statute, a provision that does not extend beyond the DOD contractor population.

Having read though all this, we want to point out that in any particular interaction with the IRS, a situation similar to a visa interview pertains:  The IRS agent’s understanding of the rules will be more important than the rules themselves, though the taxpayer has the ability to challenge that understanding through additional filings and recourse to the U.S. Tax Court.  We’ve seen cases where these claims have not been challenged and any individual claimants “mileage may vary.”

If you have questions, feel free to comment here or at our Twitter or Facebook links.

State Tax Residency and Filing Requirements

Summary:  State level filing requirements can be tricky for those who move around during their careers with the same employer. It’s important to maintain correct witholding certificates with the states in question and to file timely using the correct status. It’s easier to have a filing requirement you don’t know about than you think.

Our Example

Taking a break from tax return prep for this post based on a discussion in a group on Facebook.  Many of our clients work overseas and move around quite a bit, several with nexus in the DC/MD/VA (DMV) region while wanting to maintain residency in their “home of record” or “home leave” states, the place they started from. I’ve adapted this blog post from a contribution I made there. While this is specific to clients covered by the Foreign Service Act of 1980, in general, the framework applies to anyone working overseas. I’ve used New York as an example but the general outline, with specific modifications for each state, territory, or district, applies.

Assume you are a resident of New York when you join the Foreign Service (or other agency — these comments do not apply to those covered by the SCRA). You will remain a resident of New York until either you or circumstances force a change. At the time of entry, you filled out a federal witholding certificate and a New York one. You then continue filing a resident state return until circumstances change that.

For many U.S. government employees, but this applies to any large corporation for which you may be moved around, the circumstance that changes the situation is an assignment (TDY or PCS does not matter) to the DMV region (or wherever your headquarters is located out of state) during which you exceed one of the DC/MD/VA (DMV) tests for residency. Note that the DMV authorities tax all income regardless of residency status after one of the test thresholds is passed (resident, part-year resident, or nonresident return required).  The tests Virginia applies, for example, can be found here: Virginia has an income threshold requiring one to file even if still a resident of another state, in that case filing a non-resident return.

State level witholding certificates should be regularly adjusted for those who anticipate having to file a state-level return whether it is resident, part-year resident, or nonresident, to match where tax is going to be paid. A few years ago, some employers in the DMV, including government agencies, began automatically changing witholding for permanent moves into the DMV but those working even temporarily (TDY in government terms) need to be careful to avoid having underwitholding penalties.

Once you have become a resident of a DMV jurisdiction, you will remain there even if you depart on an overseas assignment unless you take steps to return your tax domicile to your original state or another one in which you can establish residency.

Using New York as an example, we have this hypothetical. Individual with New York residency joins the U.S. Foreign Service (State Department). Remains a New York resident and files a New York resident return to reconcile New York witholding with New York tax due. If in the DMV for training and does not cross a DMV threshold, files a DMV nonresident return for years in which this is required by a DMV test, whether the physical presence test or the income test. Continues filing NY resident and getting credit for tax paid on a DMV return. Goes overseas and continues filing NY resident until crossing the NY Group B criteria found at the link below. Files nonresident NY from that point on until back in the DMV or NY and the cycle continues.

This is all so much easier for those covered by the SCRA, generally uniformed military.

New York has its own witholding certificate which does not allow those with New York residency to be exempt from witholding even if the taxpayer will have no tax due or meets the test for filing a nonresident return due to the nonpresence test. The federal W-4 is not an allowable substitute though we’ve seen situations in which an employer erroneously accepts it as such and will modify state witholding anyway. To be exempt from New York witholding, a New York resident must be young, or old or in the military and assigned out of state. Note all the “ands” in the conditions to qualify for exemption:

Most state level tax authorities have a definition of “source income” that looks to where the business or service the worker is performing is taking place. It does not consider where the employing entity is located (the corporate headquarters or government agency headquarters), but rather where the worker is located and working. For example, if I work in Virginia, as a U.S. State Department employee, I have Virginia sourced income regardless of the State Department headquarters officially being in the District of Columbia. If I were assigned to United States Mission to the United Nations, I would have New York sourced income according to New York.

Have fun playing with the endless combinations and permutations of this framework throughout your careers!  Be careful though with the statute of limitations built into most state level jurisdictions’ tax laws. Generally, if no return is filed, no clock has started on the time limitation. These issues could pile up into quite a disaster over many years. Some states (and the District) can be quite aggressive once they detect a revenue opportunity.

These comments do not constitute tax advice and are offered for discussion only. Consult with a qualified tax professional to discuss your specific situation.

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Best Way to Maintain Your Immediate Cash Reserve

Summary: Maintaining your cash reserve, typically six months of income, in an online bank’s savings account will allow you to earn the highest rate of return on those funds while maintaining ready access to the funds without market risk exposure. An account with Treasury Direct is another option for some of the funds that don’t have to be immediately available. End Summary.

A client, a federal government employee, asked for advice on how to maintain her cash reserve and it makes sense to summarize that in a blog post. First, let’s review the basics.

The rule of thumb is to maintain six months worth of income readily available in order to weather things like job losses, vehicle emergencies, and other similar contingencies.  It’s important to do this in order to avoid taking on debt during these situations or to have to liquidate investments during a down market in order to meet these requirements.  Saving in such a fund, even while in debt, is an important component of debt reduction because without it, it can seem impossible to break the debt cycle given life’s financial uncertainties. A good strategy is to contribute an amount to the fund each paycheck while servicing one’s debt or even paying down the principal, albeit at a slower rate given the savings buildup. Okay, that said for context, here’s the main issue.

Most financial institutions are paying less than a half percent interest on deposit balances. Inflation is in the two percent range so that money is actually losing value. The good news is that there are other options. Here comes online banking to the rescue. A quick search on “online banking interest rates” will bring up several quick comparison sites. We, as always, strive to save you time. Our pick:  Goldman Sach’s Online Savings Account.  The account has no minimum balance, can be opened fairly easily online, and is currently paying 2.25 percent APY interest compounding daily. That’s a winner. That said, there are several similar offerings, so feel free to shop around.

Another option for balances that don’t need to be immediately available and yet for which you don’t want market risk exposure, is the U.S. government’s Treasury Direct.  Through an account there you can invest directly in short-term bills and bonds with various time horizons. We use this, as do several clients, and find it an easy way to eak out a bit more interest.

Drop us a line if you have questions or send a message at the firm’s facebook page.

Robo Advisor versus Full Service Live Advisor

I started an experiment a year ago or so to compare a Robo-Advisor  with traditional brokered investment accounts I’ve had for years and an initial verdict is in: The RA beat the traditional approach including a fund we have that only uses Vanguard ETFs. So, even if you “like” the broker you’ve been dealing with, a person who may have a conflict of interest with you (the better things work for him/her, the worse they work out for you in terms of transaction fees, 12(b)1 kickbacks, risk, and the like), you may want to consider transitioning to a RA.

I shopped around between several offering, including Wealthfront, Betterment, Wealthsimple, and others and settled on Wealthfront based on its balance of assets under management (the viability of this niche industry depends on low client acquisition costs and scale) and its ease of account establishment and low costs for initially small accounts.

All of these firms are built on the theory of modern portfolio theory which is only modern if one thinks of the 1950s as being “modern.” In any case, this approach to investing beats 94% of actively managed approaches and it’s not likely that our “normal folk” clients have access to those insider approaches.

An interesting angle for taxable investments is the tax loss harvesting feature that approaches, but doesn’t technically cross,  the legal proscription against wash sale tax deductions. Wealthsimple’s algorithm (and those of several other RAs) places a buy order for a near peer security (in the age of ETFs, this isn’t hard) whenever it looks like there is a loss that isn’t going to recover timely. You’ll get to deduct the loss without actually leaving the market since the sale and buy take place in accordance with Internal Revenue Code provisions. Neat, huh?

Another feature we really liked was the up-front discussion of risk. These discussions take place in a RA environment with little of the hedging of a live investment manager who may be tempted to steer you toward investments that exceed your risk tolerance. The computer doesn’t have a personal stake in your game.

We’ll keep an eye on the phenomenon so you don’t have to. We intend to grow our personal Robo-Advisor holdings at the expense of traditional, actively managed holdings. At this point, it looks like the best aspects of several strategies and tools, combining the buy and hold strategy of MPF and dollar-cost averaging, with portfolio rebalancing to manage risk and tax-loss harvesting only a computer can achieve at the lowest cost.

We aren’t investment advisors and don’t want to be. That said, part of our game is helping clients to invest the money we save them on their taxes through our low fees and tax code expertise and the RA milieu looks like a winner to us.

Obamacare (AKA, the PPACA) and Shared Responsibility Payments

The ever-politicized Patient Protection and Affordable Care Act (PPACA) branded “Obamacare” by those who never liked it was modified under Congressional budget rules in the Tax Cuts and Jobs Act the president signed into law last week. While actually modifying the provisions of the PPACA wasn’t possible in the parliamentary chicanery of the budget law, Congress did provide for changing the penalty calculations as they do have revenue effects. The two ways to calculate the penalty, which remains a “greater of the two” penalty, had their rates changed from 2.5 percent to zero percent of “household income in excess of the return filing threshold,” with a minimum that changed from $695 to $0. A creative approach, no? Leave the penalty in place, but reduce it to $0.

An aspect that may take some by surprise, however, is that the rate reduction does not take place until after 12/31/2018. So, dear clients, please make sure you have some kind of coverage to avoid what will be a painful fine for those without coverage.

Contact us through our contact form if you’d like to discuss options.

Tax Changes

Well, the president signed the tax bill so it is now law starting after December 31, 2017. We’ve gotten a lot of inquiries from clients about what this means so we’ll start unbundling the law as it applies to our client base over the next couple of weeks.

The first point that applies to all of our clients is that the new law doesn’t apply to the year that is about to end (Tax Year 2017). So, you’ll still be able to itemize just like always. That means:

  • getting all those charitable contributions made before the 31st

In addition, since this is the last time that many will be able to itemize (or, frankly, need to do so), take a look at these options:

  • Prepay property taxes due in 2018
  • Re-register personal property like vehicles in advance if there is a tax involved
  • Prepay items like alimony
  • Pile on medical expenses especially if you’ve hit your deductible — probably too late for most of us since our providers are on holiday vacations!
  • Prepay professional memberships like unions, chambers of commerce, the AICPA (in my case!), and the like
  • Make purchases that qualify as unreimbursed employee expenses this year rather than waiting till 2018
  • Pay your January mortgage payment in December (pay for two months in December)

What’s the common thread on all of these? They are items that you can deduct now but not next year and if you pay them in advance, you’ll be able to take the deduction on your tax return that you file before April 17, 2018. Scan your 2016 Schedule A for items you may be able to pay in advance since they won’t be deductible when you file your tax return in 2019 (for tax year 2018).

Note that in the fine print for this provision, the TCJA law’s implementation is going to require property owners to have a tax levy notice in hand in at the time of payment in order to take a deduction for prepayment of property taxes. Check with your county assessor or equivalent before attempting prepayment. Additional details are available at this IRS page but we read this stuff so you don’t have to.

If any of this is confusing, contact us for a one on one follow up.

To Buy or Not to Buy a New Car?

The genesis of this article was a brief conversation in which a colleague was justifying the purchase of a new car. Now, he already has a car, it’s not the car he’d buy today, and he’s still making payments on it. Recently, the air conditioner stopped working and he’s not yet troubleshot the problem. It could be the compressor, the clutch (something as simple as a fuse), a problem with the expansion valve or other evaporator problem. It could have a leak that allowed all the refrigerant to leak out. In any case, this problem is being used to justify taking on additional debt to get a more expensive, larger vehicle. He also wants an electric car, an issue that we’ll set aside for a later post.

The real issue, though, isn’t the pending repair bill. It’s the masking of a debt-financed consumption desire by the repair bill. This makes me think of an analysis I conducted years ago when faced with a similar decision.

Back then, I got a second job on the other side of town, almost an hour away by freeway driving time. I was driving a ten-year-old car at the time and it didn’t get the best mileage. The thought occurred to me that I might be able to get a new car and actually save money based on the increased fuel efficiency. But, before I jumped into a new car, and commensurately, a new car loan, I wanted to confirm the numbers. To my surprise and disappointment, the numbers just didn’t work out. Gas would have had to have gotten up above $5.00/gallon to make my decision work financially. So, with that off the table, I was reduced to considering a consumption rather than a financial decision.

As with any consumption decision, the issue is this: What do I want to give up to consume X [insert whatever you’re thinking of buying at the X]? Now, given my framework, I value consuming financial stability above everything except a place to live, necessary clothing, and food. Following stability is financial well-being and a long, relaxed, partial-retirement (what’s come to look like the “gig economy” except I can work when I want to and play when I don’t want to work). After that, my framework allows for entertainment, social considerations, and outright consumption like adult toys (all that sporting hobby equipment, not what you were thinking!).

Where did a new car come out then? It didn’t. I continued to drive the old car until it’s engine head warped (it was aluminum) and even then, I looked closely at dropping a new one onto the engine. One of our saving funds was new car purchases so we also shopped for a small subcompact and found a good deal for a Nissan Sentra, 5 speed, bottom-grade trim car. We were then off and running for another ten+ years. We sold that car overseas when we’d had it for 12 years.

Transportation purchases are one of the most common wealth-draining purchases people make. At this point, I’ve heard almost every rationalization known, and they are all just excuses. The real issue is to learn to manage wants versus needs. Conflating the two is what holds most people back from financial well-being. The tool to avoid this: Having a financial framework that allows you to produce a budget and stick with it. The framework will allow you to have a ready reference to how you prioritize what you do with your financial resources today and tomorrow.

There’s also a maxim at play here. “Don’t let a bad decision cause you to make more bad decisions.” Say, for example, you don’t like the car you bought. Perhaps you deem it to be unreliable. To come to terms with a reasonable decision, given your financial framework (or philosophy some call it), run the numbers, throw in some probabilities, assess the ranges, figure out what you have to give up (all the other possibilities for those dollars) and then make your decision. In this case, there’s likely little way that the most expensive air conditioning repair will justify driving another car off the lot.

The money you save by controlling consumption impulses will allow you to focus on building wealth. Financial freedom and non-working retirement years require income streams. Only productive capital can produce those streams. Every time we buy something that isn’t productive, we’ve taken a step back from financial freedom.

While this is not a financial lifestyle blog, the reality is that you do have to save money in order for us to help you build tax-advantaged wealth. Once you are accumulating savings, don’t forget to have a chat with us about where you are, financially, and where you want to be.

Year-End Tax Review

As we come to the end of 2017, there’s a final chance to take advantage of remaining 2017 opportunities and to begin positioning for 2018. If the House and Senate agree on and pass a tax code revision this year (and the President signs it), we’ll publish our take on what that means for the various components of our clientele. This article focuses on remaining 2017 opportunities.

Fund Your IRA

Even if you participate in your employer’s 401(k) plan, consider setting up (if you don’t already have one) and funding an IRA this year (or making a contribution if you have one). For many of our clients, your IRA contribution won’t be tax deductible and they won’t qualify for a Roth IRA. But, in 2017, the opportunity to make a non-deductible contribution remains open for everyone and clients have the right to change their minds later on and recharacterize that contribution to a Roth.

We’ve written previously about the wonder of self-directed IRAs for opening up the investment horizon to rental real estate, tax liens, promissory notes, and other options not available through brokerage-administered IRAs. All that remains true and we’re working on an update.

For clients who are hitting their maximum deferred compensation limits of $18,000 for 2017, reducing any unmatched amounts to allow for an IRA contribution makes sense since clients then have more control of their investment options. This is even true for those who have access to the Federal government’s Thrift Savings Program — we recommend that any amounts saved for retirement beyond 5% of pay be contributed to an IRA rather than the TSP (yes, we’ve taken the ultra-low-cost TSP administration fees into account in making the recommendation). The same logic applies to 401(k) plans in general. Clients should plan on making an IRA contribution in 2018 and adjust their payroll withholdings accordingly.

Charitable Contributions

Charitable contributions remain deductible for 2017 so we recommend clients take a few minutes to review their charity list from previous years and to take a look at funding some new ones. Many states have a “double dipping” list of charities and even tax credits that make giving to specific types of charities a dollar-for-dollar reduction up to the taxpayer’s state liability. In Arizona, for example, donations to charities that qualify as “Qualifying Charitable Organizations” that support foster care or the working poor reduce taxpayer liability in the amount of the contribution up to $400. Arizona allows these contributions to made up to the return due date of April 17, 2018.

We hope folks don’t forget local schools contributions as an option either especially if there is a local tax credit available in their states.

Tax-Free Medical Funds

Many clients set aside pre-tax funds in the various options (MSAs, HSAs, FSAs). Review those if yours has a “use-it-or-lose-it” component and get to the dentist or whatever. If an individual or family has met their health plan’s deductible, getting elective procedures or tests done this year will save, especially if meeting the deductible next year isn’t likely. Think about how much to set aside for 2018 and remember that FSAs now have the ability to roll over limited amounts rather than simply losing them.

Tax Loss Harvesting

If clients have had a windfall sale during the year, now’s the time to sell portfolio holdings at a loss, especially if a similar (but not identical) asset (not the same one) is available for immediate purchase with the freed up funds. Clients should avoid triggering the IRS’s wash sale rules by repurchasing the exact same asset just sold.

Prepaying Tuition

This may be the last time this one works. The Hope or Lifetime Learning credits are still available for 2017.

Small Business Deductions

This is the true engine of wealth generation — investing in productive assets. Major asset acquisitions that can still be deferred to 2018 may get a better treatment by doing so. For most filers, though, this won’t make a difference and we recommend taking the deduction in 2017.

Summary List

This list summarizes the article’s points and adds items to consider for your upcoming filing.

  • Penalties for early withdrawal of savings
  • Alimony paid
  • Student loan interest
  • Prescription eyeglasses, contacts, and hearing aids
  • Crutches, canes, and orthopedic shoes
  • Medical transportation costs
  • Cost of alcohol or drug abuse treatments
  • Charitable contributions
  • Local and state income taxes
  • Personal property taxes or real estate taxes
  • Points paid for a mortgage or refinancing a home
  • Unreimbursed employee business expenses
  • Mileage and other expenses associated with volunteer work
  • Casualty and theft losses
  • Tax preparation software and tax-preparation fees

As always, our articles are not intended to be specific advice. We publish them to stimulate discussions with each client so please contact us with your thoughts and questions regarding the points you found interesting or relevant to your situation. We’re awaiting your email or message.