Your year-end activities probably include getting together with family and friends. Perhaps less enjoyably, it should also be a time to consider some steps you may be able to take to lower the tax bill on your 2017 income.

Higher-income earners must be wary of the 3.8% surtax on certain unearned income. The surtax is 3.8% of the lesser of:

  1.   net investment income (NII), or
  2.   the excess of modified adjusted gross income (MAGI) over a threshold amount (this is $250,000 for joint filers or surviving spouses, $125,000 for a married individual filing a separate return, and $200,000 for all others).
As year-end nears, a taxpayer's approach to minimizing or eliminating the 3.8% surtax will depend on his or her estimated MAGI and NII for the year.

Some taxpayers should consider ways to minimize (for example, through deferral) additional NII for the balance of the year, others should see if they can reduce MAGI other than NII, and other individuals will need to consider ways to minimize both NII and other types of MAGI.

The 0.9% additional Medicare tax may require higher-income earners to take year-end actions. The tax applies to individuals for whom the sum of wages they receive for employment and their self-employment income is in excess of an unindexed threshold amount:  $250,000 for joint filers, $125,000 for married couples filing separately, and $200,000 in any other case.

Employers must withhold the additional Medicare tax from wages in excess of $200,000, regardless of filing status or other income. Self-employed persons must take it into account in figuring estimated tax.

There can be situations where an employee needs to have more withheld toward the end of the year to cover the tax. For example, if an individual earns $200,000 from one employer during the first half of the year and a like amount from another employer during the balance of the year, he or she would owe the additional Medicare tax – but there would have been no withholding by either employer for the additional Medicare tax, since wages from each of them did not exceed $200,000.

Consider realizing losses on stocks while still substantially preserving your investment position. There are several ways this can be done. For example, you can sell the original holding, then buy back the same securities at least 31 days later. It may be advisable for you to meet with us to discuss possible year-end trades.

To lower your 2017 tax bill, postpone income until 2018 and accelerate deductions into 2017. This strategy may be especially valuable if Congress succeeds in lowering tax rates next year in exchange for slimmed-down deductions.

Regardless of what happens in Congress, this strategy could enable you to claim larger deductions, credits, and other tax breaks for 2017 that phase out over increasing levels of adjusted gross income (AGI). These include child tax credits, higher education tax credits, and deductions for student loan interest.

Postponing income is also desirable for taxpayers who anticipate being in a lower tax bracket next year due to changed financial circumstances.

Note, however, that in some cases, it may actually pay to accelerate income into 2017. For example, this may be the case if you will have a more favorable filing status this year than next (e.g., head of household versus individual filing status).

If you believe a Roth IRA is a better option for you than a traditional IRA, consider converting traditional-IRA money invested in beaten-down stocks (or mutual funds) into a Roth IRA if you are eligible to do so. Keep in mind, however, that such a conversion will increase your AGI for 2017.

If you converted assets in a traditional IRA to a Roth IRA earlier this year and the assets in the Roth IRA account declined in value, you could pay more tax than necessary. You can back out of the transaction by recharacterizing the conversion – that is, by transferring the converted amount (plus earnings, or minus losses) from the Roth IRA back to a traditional IRA via a trustee-to-trustee transfer. You can later reconvert to a Roth IRA.

It may be advantageous to defer until early 2018 a bonus that is coming your way, if your employer is willing to do so. This could not only defer but cut your tax if Congress reduces tax rates beginning in 2018.

Consider using a credit card to pay deductible expenses before the end of the year. Doing so will increase your 2017 deductions, even if you don't pay your credit card bill until after the end of the year.

If you expect to owe state and local income taxes when you file your return next year, consider asking your employer to increase withholding of state and local taxes (or make estimated tax payments of state and local taxes) before year-end, to pull the deduction of those taxes into 2017 if you won't be subject to alternative minimum tax (AMT) in 2017. Pulling state and local tax deductions into 2017 would be especially beneficial if Congress eliminates such deductions beginning next year.

Take an eligible rollover distribution from a qualified retirement plan before the end of 2017 if you are facing a penalty for underpayment of estimated tax and you don’t have the option of having your employer increase your withholding, or if doing that won't sufficiently address the problem. Income tax will be withheld from the distribution and applied toward the taxes you owe for 2017.

You can then timely roll over the gross amount of the distribution, i.e., the net amount you received plus the amount of withheld tax, to a traditional IRA. No part of the distribution will be includible in income for 2017, but the withheld tax will be applied pro rata over the full 2017 tax year to reduce previous underpayments of estimated tax.

Estimate the effect of any year-end planning moves on your AMT for 2017, keeping in mind that many tax breaks allowed for purposes of calculating regular taxes are disallowed for AMT purposes. These include the deduction for state property taxes on your residence, state income taxes, miscellaneous itemized deductions, and personal exemption deductions.

If you are subject to the AMT for 2017, or think you might be, you should not accelerate these types of deductions.

You may be able to save taxes by applying a bunching strategy to pull “miscellaneous” itemized deductions, medical expenses and other itemized deductions into this year. This strategy would be especially beneficial if Congress eliminates such deductions beginning in 2018.

You may want to pay contested taxes to be able to deduct them this year; you can continue to contest them next year.

Consider settling an insurance or damage claim in order to maximize your casualty loss deduction this year.

Take required minimum distributions (RMDs) from your IRA or 401(k) plan (or other employer-sponsored retirement plan). Failure to take a required withdrawal can result in a penalty of 50% of the amount of the RMD not withdrawn. RMDs from IRAs must begin by April 1 of the year following the year you reach age 70½.

That start date also applies to company plans, but non-5% company owners who continue working may defer RMDs until April 1 following the year they retire.

Although RMDs must begin no later than April 1 following the year in which the IRA owner attains age 70½, the first distribution calendar year is the year in which the IRA owner attains age 70½. Thus, if you turn age 70½ in 2017, you can delay the first required distribution to 2018. But if you do, you will have to take a double distribution in 2018 – the amount required for 2017 plus the amount required for 2018.

Think twice before delaying 2017 distributions to 2018, as bunching income into 2018 might push you into a higher tax bracket or have a detrimental impact on various income tax deductions that are reduced at higher income levels. However, it could be beneficial to take both distributions in 2018 if you will be in a substantially lower bracket that year.

If you set aside too little in your employer's health flexible spending account (FSA) this year, increase the amount you set aside for next year. If you become eligible in December of 2017 to make health savings account (HSA) contributions, you can make a full year's worth of deductible HSA contributions for 2017.

Make gifts sheltered by the annual gift tax exclusion before the end of the year, to save gift and estate taxes. The exclusion applies to gifts of up to $14,000 made in 2017 to each of an unlimited number of individuals. You cannot carry over unused exclusions from one year to the next.

Such transfers may save family income taxes where income-earning property is given to family members in lower income tax brackets who are not subject to the “kiddie tax.”

If you made qualifying charitable contributions related to relief efforts in the Hurricane Harvey, Irma, or Maria disaster areas, these are not subject to the usual charitable deduction limitations. And if you were affected by Hurricane Harvey, Irma, or Maria, keep in mind that you may be entitled to special tax relief under recently passed legislation, such as relaxed casualty loss rules and eased access to your retirement funds.

Call us to see how these or other year-end steps may help reduce your personal income tax obligation.