On Friday, December 22, President Trump signed the Tax Cuts and Jobs Act into law. This finalized what is considered to be the most significant (and contentious) tax code overhaul in decades. Many questioned if this would be done in 2017. Now that it is, there’re only days left for people to react before year end. With that in mind, here are few things for California taxpayers to consider right now.
Starting in 2018 state and income tax deductions will be capped at $10 thousand per tax year. This is particularly important for California taxpayers because California has the highest income tax rate in the country. In addition, due to soaring home prices, Bay Area homeowners also face some of the highest property taxes in the state. This means many Californians are likely to lose some the deductions they’ve qualified for in the past. What can be done before year end? Here are a few simple ideas to consider.
- Pay 2017 property taxes in full. Property taxes are deducted in the year in which they are paid (not billed). Though we generally cannot prepay 2018 property taxes, we can pay up the second installment of 2017 taxes before year-end. This would allow the entire tax to be included in the 2017 tax year deduction.
- Defer taxable income. Federal income taxes are scheduled to be reduced across the board. This is true for large corporations, small businesses, and individuals. It may make sense to defer any significant year-end taxable income into the 2018 tax year. Examples include income from bonuses, commissions, investment, or business activity.
- Delay short-term capital gains. Long-term capital gains continue to receive favorable tax rates and short-term capital gains continue to be taxed at ordinary income tax rates. Again, since federal income tax rates are going down, it may make sense to delay realizing any short-term capital gains until the 2018 tax year.
Please note this is not personal tax advice and we are not tax advisers. This is just information for you and your professional tax advisers to consider before year-end. The tax changes are complex and will affect people differently based on individual circumstances. Regardless of what the tax changes bring we wish the new year brings you happiness, good health, and continued success. Happy Holidays from all of us at BCM!
Victor K. Lai, CFA
This blog is for informational purposes only. Nothing on this blog represents advice of any kind. Investing is inherently risky and involves the risk of potential loss.