YEAR-END TAX PLANNING
Tax planning this year is less certain than normal because of the election and the uncertainty of new soon to be proposed legislation for income tax reform. However, based on proposals from President-Elect Trump and a Republican majority in the House, planning may potentially be more beneficial.
While proposals are not the same as the eventual legislation, lower tax rates for most people is a likely outcome. It appears that some itemized deductions may be eliminated, except home mortgage and charitable, so we recommend claiming all current deductions before the end of 2016. Total taxes owed for upper income taxpayers may be unchanged because lower deductions may offset the lower tax rates for earned income. To the extent possible, income should be deferred to next year when taxes may be lower, especially for capital gains.
For those who would like to make large charitable gifts over the next several years, but prefer to deduct them this year against higher marginal tax rates, consideration should be given to opening a Donor Advised Fund before the end of 2016 to claim the entire deduction this year. Also, the temporary ability to make charitable contributions directly from an IRA has recently been made permanent. For those who are over age 70 ½ and do not need their required minimum deduction (RMD) for current spending needs, part of those taxable distributions could be donated to charity to reduce the taxable distributions.
Most salaried employees have little or no flexibility as to when they receive income but small business owners and self-employed people may be able to push receipts into next year. Retirees who are in their early 60’s may be in lower tax brackets next year may consider partial Roth conversions at 15% or 25% rates. The conversion with partially or totally avoid the obligation to take taxable RMD’s from their IRAs and instead withdraw funds tax-free at their own convenience whenever they are needed in the future. If they have sufficient other funds to meet their own spending needs, their beneficiaries will receive the funds tax-free. The proposed changes will not affect all taxpayers equally. Families that do not itemize and take the standard deduction and those with large capital gains may benefit. Also, as a result of the proposed change from seven tax brackets (with rates from 10% to 39.6%) to three tax brackets (12%, 25% and 33%), some people may find that the broader bands for tax rates may include more income in higher rate brackets. In those cases, accelerating income may result in lower taxes this year. For example, those who are now filing as “head of household” will not be able to do so next year because both the Trump and GOP tax reform proposals are eliminating that filing status. Therefore, some of the current 15% bracket will be increased to 25% and the entire 28% bracket will be increased to 33%. Likewise, current personal exemptions for each dependent are being changed to larger standard deductions for individuals and married couples regardless of family size. Most families will benefit, but large families with many dependents may have more income subject to higher marginal tax rates.
As always, it is beneficial to accelerate capital losses, deductions and additional business purchases. Except for anyone already subject the AMT this year, fourth quarter state estimated taxes should be paid this year. Likewise, those paying large medical expenses, donating appreciated securities and maximizing planned charitable contributions should make those changes this year. Capital gains should be deferred but we don’t know if the current Obamacare 3.8% supplemental tax in addition to the capital gains tax will still apply.
The only certainty is the current tax rates. Proposals and wish lists generally result in watered down legislation after Congressional debates. It seems that most taxpayers will benefit while others may not. As always, discussions with your tax advisor based on your individual circumstances is the best approach.
Our best wishes to you for this holiday season and throughout the upcoming year.
Marv Kaye, J.D., CFP®
Kaye Capital Management