Year-end planning, 2016 version

The election of Donald J. Trump could have a significant impact on your finances. Individual and corporate tax laws may change, the Affordable Care Act may be eliminated, trade war may ensue, infrastructure building may boost jobs and sectors of the economy, and national defense and diplomacy could lead almost anywhere – your guess is as good as anyone else’s.

So then, how do you incorporate this into year-end planning? Very carefully!

Corporate Taxes

Our analysis starts with a review of his proposal to limit corporate income taxes to 15% as a way to illustrate how tricky planning is:

Analysis of the way this limit applies to pass-through entities suggests that the 10-year cost could be anywhere from $4.4 trillion, assuming owners of pass-throughs pay 33% tax, to $5.9 trillion, assuming owners only pay a 15% tax.

Those are hefty cost numbers, which is why it is tricky to assume that any major tax changes will be enacted in 2017.

Income Taxes

There could be three rates on ordinary income: 12%, 25% and 33%, with the latter starting at $225,001 for married filers and $112,501 for single filers. The 0.9% and 3.8% Affordable Care Act surtaxes on upper-incomers would be eliminated. So would the AMT (“alternative minimum tax”). The 20% maximum capital gains tax would remain. Standard deductions would go up, personal exemptions would be eliminated and breaks for dependent care would be increased.

Check here for 2017 tax rates.

Estate taxes

The President Elect has revised his estate tax proposal, calling now for pre-death tax on appreciation in assets of large estates, subject to a $10-million-per-couple exemption. This may be accomplished by limiting the step-up in basis for heirs who inherit capital assets from large estates.

Another change would be elimination of the IRS’s proposal to restrict the use of valuation discounts for gift and estate tax purposes on intrafamily transfers of closely held firms.

Investing and retirement

Infrastructure building could boost certain investments, while conflicts on trade agreements could hurt many.

His proposed tax changes for retirement plans include extending the age for which contributions to IRAs are allowed and delaying required minimum distributions (RMDs).

Okay, enough, how does one act now?

Some moves still make sense

Tax plan – deferring income into 2017 and adding deductions to 2016 should work well, unless doing so puts you in the AMT, in which case the reverse will work best.

Most of our suggestions from our 2015 year-end planning post still work, including RMDs, 3.8% Medicare surtax, itemized deductions, stock options, investment income and sole proprietor and small business income. Also check out our estate planning post for more ideas.

If your deductions include donating to charities, gifting appreciated assets leverages your donation. That is, you can avoid the income tax on capital gains while still benefiting from the charitable deduction. Watch for the rules on exceeding 30% of your adjusted gross income and donating to private charities.

Research Your Charities

Check out websites like such as ImpactMatters and GiveWell to make sure what you donate has the best impact. Other tools include Agora for Good, a tool to track donation impact over many sectors.

Investing – your strategy should not be altered in any dramatic way now.

If you do sell mutual funds, be sure to wait to buy replacement funds until after the dividend distribution date, so you do not end up with a taxable distribution on gains in which you did not participate

Summary

Many of the income and estate tax rules may change during 2017. However, for now, your safest plan is to assume little changes and stick to the “traditional” techniques outlined above.

If you have any questions, please contact me!

Estate Planning Update – still no federal estate tax

So far this year, there is no federal estate tax. This creates a planning quagmire.

Depending on how the estate tax clause is drafted in your estate plan, you could have the entire estate passing to children instead of a portion to the surviving spouse, or all of the estate passing to the surviving spouse, not using any state estate tax credit such that unnecessary state estate taxes become due at the first death.

Until Congress acts to pass a law to retroactively restore the federal estate tax, as expected, you should check your tax clause and review it with your attorney to see if a revision is in order.

You may find that your documents adequately deal with the combination of no federal estate tax and applicable state estate tax. Or, you may find that an amendment to your documents is needed to address this issue.

While reviewing the tax issue, make sure your durable powers of attorney and health care proxies or medial directives are also up to date.

Let us know if you have questions or comments. Thanks,

Steven

Estate Planning – will we have a new tax law in time?

Many people have argued that Congress will freeze the federal estate tax exemption at $3.5 million and the estate tax rate at 45%

The House passed such a law and sent it to the Senate early this month.

However, as described in the article below, passage of this change to current law is not certain as there are political and procedural obstacles in the Senate. (Please see a more recent comment at What to watch out for in 2010)

If no action is taken, then there will be no estate tax in 2010 and only a $1 million exemption in 2011. In the second artilce below, Kiplinger’s Tax Letter projects a 1 year extension of the 2009 law.

We will continue to watch this to see if a law does pass…. and let me know if you have questions or comments. Contact Us

Estate Tax Reform Bill Passes House, Moves to Senate

Posted on December 8, 2009

On Dec. 3, the House passed the Permanent Estate Tax Relief for Families, Farmers, and Small Businesses Act of 2009 (H.R. 4154). With time running short, the bill now moves to the Senate, where straight passage of it is uncertain, and passage of any estate tax legislation is anything but assured.

Introduced by Rep. Earl Pomeroy (D-ND), the legislation permanently extends current estate tax law, which taxes the heirs of a deceased individual whose estate is valued above $3.5 million ($7 million for couples) at a 45 percent tax rate. The Pomeroy bill passed the House by a narrow margin – just 225 to 200 – and mainly along partisan lines, though 26 Democrats did join a united Republican caucus in opposition to the measure. The bill essentially mirrors what the president asked for in his FY 2010 budget request. Most importantly, the Pomeroy bill would extend current law and prevent the estate tax from expiring in 2010 and then coming back in 2011 under its pre-Bush tax cut levels.

According to an estimate released by the Congressional Joint Committee on Taxation, the Pomeroy bill would bring in $468 million in 2010, when the government would otherwise collect no estate taxes, but then cost the government $533 billion over the next nine years because of higher exemptions and lower tax rates than would have been in place if current law was left unchanged.

Passage of the Pomeroy bill in the Senate is unlikely because several important senators have misgivings about certain provisions. Sens. Max Baucus (D-MT) and Kent Conrad (D-ND), chairs of the Senate Finance and Budget Committees, respectively, argue that Congress should index the tax for inflation, something the Pomeroy bill does not do. Moreover, the Pomeroy bill includes the Statutory Pay-As-You-Go Act of 2009 (H.R. 2920) that would give PAYGO budget rules the force of law in Congress. The House passed the PAYGO bill in July, but the Senate has yet to take action on it because, according to a recent Congress Daily (sorry, subscription required to view), top Democratic senators are opposed to enacting the provisions.

Estate tax legislation is therefore likely to go down one of two paths in the Senate. One alternative is for the Senate to bring up legislation similar to the Pomeroy bill, debate it, and pass it. The other option is for the Democratic leadership to tack a one-year estate tax extension onto a likely omnibus appropriations bill that insiders say Congress will pass before the end of 2009. Depending on how congressional events play out, either option is possible.

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Without action by Congress before the end of this year, the estate tax will disappear in 2010, but only for one year. The tax will then reappear in 2011 with just a $1-million exemption and a 55% maximum rate. In addition, many heirs of folks who die in 2010 will have to use the decedent’s tax basis for inherited assets.

The House has OK’d a permanent extension of the law in effect for 2009… a $3.5-million exemption with a 45% rate. Its bill repeals the carryover basis rule.

But the Senate has its own ideas. Finance Com. head Max Baucus (D-MT) favors continuing the $3.5-million exemption and indexing it to inflation each year, while maintaining the 45% rate. A coalition of Republicans and moderate Democrats is pushing for broader relief…a $5-million exemption and a 35% maximum tax rate. They have enough support to demand a vote for their proposal on any estate tax bill, and are likely to keep the Senate from voting on a permanent extension this year.

So a simple one-year extension of 2009 law is the likely result. This way, lawmakers can revisit the estate tax next year, after the health care debate ends. The bill will also kill carryover basis. To speed passage, the Senate may even add it to a fast moving appropriations bill that will be approved in the next week or so.

Two easings that could’ve passed in 2009 must wait because of the delay: Portable estate tax exemptions. Under current law, if a spouse passes away without having fully used up his or her exemption, the balance is wasted. Taxwriters want to ensure that any unused exemption goes to the surviving spouse. That way, taxpayers needn’t set up complicated trusts in their wills solely to save estate taxes.

And reintegrating the gift and estate taxes. The lifetime gift tax exemption is $1 million, less than a third of the estate tax exemption. Combining the two again would let taxpayers make larger lifetime gifts tax free to their heirs. Both changes must wait till 2010, when Congress will have more time on its calendar for debate.

Let us know if you have questions or comments. Thanks,

Steven