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!

The real problem facing retirement plans? Not saving enough

Recently, two debates have been brewing over 401(k) plans. Specifically, are they too expensive and should we cap the amount Americans can accumulate in the total balance of their defined benefit and defined contribution plans as well as IRAs. Is that really where the debate should be?
A recent PBS.org retirement study revealed some alarming statistics about Americans’ retirement savings habits. Specifically 30% of workers have $0.00 in retirement savings and 40% are currently not saving anything for retirement. Even factoring in Social Security, the average savings shortfall of a U.S. household will be $250,000 at retirement.
For many, if they are contributing to their retirement plans, they are contributing too little. The current belief that contributing just enough to maximize an employer’s contribution will fund your retirement is irresponsible. Only a small number of Americans will amass $1million in their retirement plans by the time they retire. According to Don Phillips in his recent Morningstar article, Fighting the Wrong War, “At a 4% withdrawal rate, $1 million in savings will provide just $40,000 a year.”
While the cost of the plans and amount we can accumulate in our retirement plans can be interesting debates, they don’t address the real issue. Will we, as future retirees, be able to fund our own retirement?

IRA Investment and Tax Planning

As 2009 draws to an end, many are checking their IRA options. Of course, the sooner you can invest, the better for your allocation, so that is a cash flow matter. As for how much you can invest, please see the 2009 limits below. Also keep in mind the Roth IRA conversion options mentioned in a prior newsletter.

Here are the rules from the IRS website:

Modified AGI limit for traditional IRA contributions increased. For 2009, if you are covered by a retirement plan at work, your deduction for contributions to a traditional IRA is reduced (phased out) if your modified AGI is:

* More than $89,000 but less than $109,000 for a married couple filing a joint return or a qualifying widow(er),

* More than $55,000 but less than $65,000 for a single individual or head of household, or

* Less than $10,000 for a married individual filing a separate return.

If you either live with your spouse or file a joint return, and your spouse is covered by a retirement plan at work, but you are not, your deduction is phased out if your modified AGI is more than $166,000 but less than $176,000. If your modified AGI is $176,000 or more, you cannot take a deduction for contributions to a traditional IRA. See How Much Can You Deduct? in chapter 1.

Modified AGI limit for Roth IRA contributions increased. For 2009, your Roth IRA contribution limit is reduced (phased out) in the following situations.

* Your filing status is married filing jointly or qualifying widow(er) and your modified AGI is at least $166,000. You cannot make a Roth IRA contribution if your modified AGI is $176,000 or more.

* Your filing status is single, head of household, or married filing separately and you did not live with your spouse at any time in 2009 and your modified AGI is at least $105,000. You cannot make a Roth IRA contribution if your modified AGI is $120,000 or more.

* Your filing status is married filing separately, you lived with your spouse at any time during the year, and your modified AGI is more than -0-. You cannot make a Roth IRA contribution if your modified AGI is $10,000 or more.

See Can You Contribute to a Roth IRA? in chapter 2.

Modified AGI limit for retirement savings contributions credit increased. For 2009, you may be able to claim the retirement savings contributions credit if your modified AGI is not more than:

* $55,500 if your filing status is married filing jointly,

* $41,625 if your filing status is head of household, or

* $27,750 if your filing status is single, married filing separately, or qualifying widow(er).

See Can you claim the credit? in chapter 5.

Temporary waiver of required minimum distribution rules. No minimum distribution is required from your traditional or Roth IRA for 2009. See Temporary waiver of required minimum distribution rules for 2009 in chapter 1.

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

Steven

In divorce, do you keep the house or the 401(k)?

Real Estate: Bubble or not? How does it effect our Divorcing clients

By Howard I. Goldstein and Steven A. Branson

This article was wrtiten a few years back and appears at the following link on line at DivorceHQ.com, http://www.divorcehq.com/articles/realestatebubble.html and on Howard Goldstein’s site. However, the financial calculations are still relevant.

Copyright 2005. Steven A. Branson and Howard I. Goldstein