By Anthony “Skip” Smith, CPA
Typical year-end tax planning advice expounds on the virtues of accelerating deductions and deferring income, where opportunities are both possible and economically viable. With the prospect of early 2017 GOP control in both the executive and legislative branches of the federal government, the strategy takes on a higher sense of urgency with the prospect that income tax rates may drop in the future.
Both the House GOP blueprint and President-Elect Trump have emphasized tax reform as a major goal. Tax reform involves both tax simplification and reduction of the marginal tax rates for C corporations, individuals, and even income from pass thru entities (Partnerships, LLC’s and S Corporations) are common themes. For individuals in the top marginal 2016 federal tax brackets (potentially as high as 44% **) the economic value of deductions taken in December of 2016 versus 2017 could be significant.
Typical items that can be accelerated, such as payment of real estate taxes, sales tax, state and local estimated tax payments, and charitable contributions, might be worth 10% more on the dollar by paying in December versus next year. Conversely, deferring until 2017 gains recognized on the sale of stocks or other property, or, just deferring income in general might be beneficial. Conferring with your investment advisor to accelerate and harvest any portfolio loss positions could potentially result in more after-tax savings.
High level views considered by both the House and President Elect Trump include:
- Simplified Individual tax brackets of 12%, 25%, and 33%
- Elimination or limits on the amount of allowed charitable deductions
- Repeal of the 3.8% Net Investment Income Tax embedded in the Affordable Care Act on certain income, gains, and pass thru entity income.
- Reduction of long term capital gain tax rate from 20% to 15%
- Exclusion up to 50% from tax for certain investment income, interest dividends, and capital gains
- Repeal of federal estate and gift tax (although Washington State Estate Tax would still continue to apply)
- Reduction of C corporation top tax rate from 35% to 25% or lower, and, a limit on pass thru entity income to owners to 25% or lower
- Repeal of itemized deductions for taxes (sales tax, state and foreign income taxes) and two versions of the GOP plan allow only mortgage interest and charitable contributions as itemized deductions
- Significant increase in the individual standard deduction making itemized deductions less attractive to taxpayers ($15,000 for individuals and $30,000 for couples under President Trump’s plan)
- President-Elect Trump’s plan further puts a $100,000 cap for singles and $200,000 for couples on total itemized deductions.
Of course, each individual or business must decide whether to implement specific year-end strategies based on the context of their unique situation. Accordingly, it could be extremely beneficial to have a conversation with your CPA now about how the potential changes might impact you.
** 39.6% Top Marginal Rate, plus 3.8% Net Investment Income Tax Rates, plus deduction phase outs approximate 44%.
© 2016 Clark Nuber PS All Rights Reserved