President-Elect Donald Trump’s proposed tax plan contains many significant changes to the tax code. In general terms, we can reasonably expect two changes likely to occur—individual tax rates to decrease and allowable itemized deductions to be limited. This article will provide a brief overview of some of the more probable changes and potential planning opportunities in light of the changes. Please exercise caution when considering these moves as you will be taking calculated risks based on legislation that is probable but not yet set in stone.
- Accelerate itemized deductions into 2016—Trump’s plan is to significantly increase the standard deduction for taxpayers in all tax brackets. This will drastically decrease the number of taxpayers who will be able to itemize deductions going forward, especially those in the lower brackets. He also plans to limit allowable deductions for those still be able to itemize, either through a cap or an outright elimination of certain ones. Further, since tax rates are likely to decrease in 2017, be aware that itemized deduction are generally worth more when tax rates are higher. Example planning moves to consider before December 31, 2016 include paying your January estimated taxes in December, making your January mortgage payment in December, and making your 2017 charitable donations in 2016.
- Postpone receipt of income—Marginal tax rates are likely to decrease for individuals across the board. If you are a cash-basis business, postpone December billings into January. Also consider contributing additional funds to your retirement plan.
- Contribute appreciated stock to charities—in light of proposed decreased rates and limitation on deductions, it might make sense to contribute low basis stock to a charitable organization. By doing this, you will avoid capital gains tax on the stock while also getting a charitable contribution deduction based on the fair market value of the stock at the time of the gift.
- Accelerate capital losses and postpone capital gains—Trump plans to eliminate the 3.8% net investment surtax on capital gains. Paul Ryan’s plan goes much further as his plan proposes a 50% exclusion on capital gains. If your portfolio has produced significantly high capital gains in 2016, consider selling stocks that will produce capital losses before year-end. Capital losses harvested in 2016 will likely be more valuable to you. Conversely, if you are considering selling stock at year-end with a large gain, you might want to hold off on selling until 2017 if possible.
- Fund a qualified retirement plan—tax rates are likely to decrease for most taxpayers as previously mentioned. If tax rates go down in 2017, deductions from retirement contributions will be more valuable to you in 2016. Consider establishing and funding a Simplified Employee Pension individual retirement account (SEP IRA) if you are self-employed.
The tax planning strategies mentioned in this article are very broad and are meant to be thought-provoking. As with most tax advice, it is certainly not a one-size-fits-all approach. Please contact us if you have any questions about year-end planning, and we will develop a strategy that best fits your particular situation.