December is always the season for year-end tax planning. And as with any new administration, President-Elect Trump has his own ideas of tax reform. Which ideas of his that become law is pure speculation, of course. But, as with any new administration, you should take these possibilities into consideration for year-end tax planning. In that spirit here are some 2016 year end tax tips to consider under Trump’s PROPOSED 2017 changes:
Defer or Accelerate Income from 2016 to 2017
Trump is proposing a cut in income tax rates. The smart move may be to push income into 2017 and gamble it will be taxed at a lower rate. The savings for high income earners would be significant—6%!
It is important to understand that the “Head of Household” status may be eliminated under the Trump plan. That would shift 51% of single parents to file in much less favorable tax brackets. This would mean a 40% increase in income taxes! Head of Household filers may want to ACCELERATE income into 2016.
Another group paying more income taxes under the Trump plan are single filers in the income brackets of $127,500 to $200,500. Your rates would jump from 28% to 33%! These single filers may want to ACCELERATE income into 2016.
Accelerate or Defer Expenses from 2016 to 2017
If your income tax rate has the possibility of being reduced under the Trump plan, the smart move would be to accelerate expenses into 2016. The expense will be a higher tax deduction in 2016 with the higher rates in 2016 rather than the lower rates in 2017.
Note if you are in a group that may be anticipating a higher tax bracket in 2017, you may want DEFER expenses to 2017! That is because the expense will be worth more in 2017 than in 2016. That would affect those with the “Head of Household” status and the single filers in the income brackets of $127,500 to $200,500 discussed above.
The next discussion, however, provides pause to those thinking of deferring expenses into 2017.
Potential Cap on Itemized Deductions for high income earners
President-Elect Trump is proposing to limit the total cumulative itemized deductions at $100,000 for single people and $200,000 for married couples. With such a high cap, this proposal will not affect very many people.
The proposal to cap deductions has profound implications.
If you like to make large year end charitable contributions, the contribution might wind up not being deductible under the proposed cap! You may want to consider making your charitable giving decisions in 2016 to avoid a trap in 2017. (Qualified Charitable Distributions are not affected by any of the new administration’s proposals. You may want to start reviewing that option now for 2017. See how it may affect your decision making for the year 2016).
The proposed cap affects other deductions as well. This includes state and local income taxes, sales taxes, property taxes, mortgage interest, medical expenses, and miscellaneous deductions. If you are concerned about the cap, consider paying these expenses by December 31, 2016 (but watch out for AMT!).
The alternative minimum tax [AMT] would be abolished under the Trump proposal. The smart move here would be to massage items that trigger AMT from 2016 to 2017. (This tip conflicts with the tip given to those facing the cap discussion above. One would have to “run the numbers” to see which idea makes more sense to you!).
Capital Gains Considerations
No change has been proposed by President-Elect Trump in the capital gains rates. That would suggest no special tax planning considerations should be given to any buy/sell decisions for 2016.
However, if you are subject to the 3.8% Medicare surtax on your capital gains, read the next discussion.
TrumpCare Repeals Medicare Surtax
TrumpCare would repeal the 3.8% Medicare surtax on net investment income. The best strategy would be to shift investment income from 2016 to 2017 and possibly avoid paying the surtax.
Investment income would generally include interest, dividends, capital gains and other portfolio income. It affects single filers with over $200,000 in income and married filing jointly filers with over $250,000 in income.
Combining the elimination of the 3.8% Medicare surtax with the slashing of income tax rates could mean huge potential tax savings for interest and dividend income in 2017!
Capital gains income would still enjoy a 3.8% tax reduction for the affected taxpayers in 2017.
Business Tax Changes
President-Elect Trump proposes slashing the corporate rate from the current 35% to 15%. C Corporations should perhaps consider pushing profits from 2016 to 2017 in anticipation of this proposed change.
President-Elect Trump would apply the same 15% tax rate to business income from sole proprietorships and business income passed to individuals from S Corporations, Partnerships and LLCs. That creates a huge incentive to push profits into 2017 from 2016 and gamble it becomes law. Depending on your tax bracket, the tax savings could be as much as 50% of your income taxes!
The Bottom Line
No one has a crystal ball of what the future will bring. The impact of any changes under the Trump administration is anyone’s guess at this point. But you would be remiss if you do not have the best information available to make plans for year end 2016.