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!

Possible tax law changes and tax planning opportunities

From the predictions we see, Congress will be reviewing and in most cases renewing certain tax cuts. They will also pass some additional tax changes.

Here is a summary of what is expected to become law (let me know if you need more detail):

The following expired provisions are expected to be renewed: The tax free status of distributions made directly from IRAs to charity; the add-on to the standard deduction for state and local property taxes; tax breaks for state sales tax, college tuition and teachers’ school supplies; 15-year write-offs for restaurant renovations and leasehold improvements; and the R&D tax credit. The will also be a small business tax cut for hiring (let me know if you need details).

2010 is the year for Roth IRA conversion strategies, where the taxes can be paid over two years. Because of market volatility, you may want to have separate IRAs by asset classes so if one goes down, you can “un-convert”. (See prior posts on this) Note, however, that Roth conversion income can affect Medicaid premiums and taxation of Social Security benefits.

Also expected is an increase of tax rates for income and capital gains taxes for high income tax filers, where one possibility is raising the top tax rate to 39.6% on singles with taxable income above $196,000 and on married couples for taxable income over $231,000. With this could be a top capital gains rate of 20% for this group, up from 15% now. Itemized deductions could be affected as well – perhaps by capping at 28% the rate at which itemizations reduce a filer’s tax liability.

Future changes to tax rates will affect planning for 2010 – taking more income and possibly selling assets then later buying them back to up the basis for future sales.

The item still missing from the list is the fix for the estate tax (see prior posts on this). The expected change will be reviving the estate tax retroactive to January 1. However, Democrats support a $3.5-million exemption amount and a 45% rate while Republicans want $5 million and 35%. If no action is taken, 2010 will continue to have no estate tax and 2011 will have a $1 million exemption with a 60% top rate.

If you want to consider how this all applies to you, for income taxes or estate planning, let us know.

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

Steven