The Republicans will have control of the White House and both houses of Congress beginning in 2017 which means tax reform is being discussed. However, the Trump proposal and the House GOP proposal (titled: A Better Way for Tax Reform) differ substantially in many respects. These differences should lead to considerable negotiations before a possible reform of the tax code can be pushed forward. The uncertainty around potential tax reform complicates traditional year-end tax planning in 2016. In this KnowledgeSHARE we summarize the current income tax rates along with some of the salient provisions in the Trump and House GOP proposals and we list some strategies that taxpayers may want to investigate with their team of advisors prior to year-end.
Current 2017 Income Tax Rates –
In October the IRS announced annual inflation adjustments to 2017 tax rates should the existing system remain intact:
Trump & House GOP Tax Proposals –
A brief summary of the proposed tax rates under the Trump and House GOP proposals with some additional prominent provisions noted below:
Other Notable Provisions:
- Repeal 3.8% Net Investment Income Tax (NIIT)
- Eliminate Alternative Minimum Tax
- Eliminate personal exemptions and HOH filing status
- Cap itemized deductions at a certain level
- Institute a higher standard deduction amount
Other Notable Provisions:
- Repeal 3.8% NIIT & .9% Medicare Surtax
- Consolidate personal exemptions and certain credits into a larger standard deduction
- Eliminate itemized deductions aside from mortgage interest and charitable contributions
Strategies to Consider With Your Team of Advisors –
While much remains uncertain, many industry professionals and experts agree that if any legislation is passed for tax reform then rates will decrease for many AND there will likely be changes made to eligible deductions for those who itemize on Schedule A. With that in mind there are certain year-end planning strategies that may be worth investigating in 2016 given the possibility of tax reforms in the near term. Some ideas currently under discussion in the financial and accounting communities are briefly listed below:
- Accelerate deductions
- Front-load charitable contributions (consider a Donor Advised Fund)
- Pay medical expenses in 2016 (especially for those taxpayers 65 or older to take advantage of 7.5% AGI threshold which is scheduled to revert to 10% in 2017)
- Pre-pay state income tax liability with a Q4 estimated payment prior to 12/31/16
- Pre-pay property taxes
- Consider making your mortgage payment for January in December
Caution! Have a discussion with your tax advisor to avoid taking too many deductions, you may subject yourself to the Alternative Minimum Tax (AMT).
- Defer income
- Maximize pre-tax deferrals to qualified plans and retirement accounts
- Postpone income receipts to the extent possible
- Revisit timing of planned full and partial Roth conversions and whether to initiate in 2016, or 2017 and beyond
- Carefully consider the implications of taking action on company equity grants (option exercises, 83(b) elections, etc)
Caution! The proposed tax rates would benefit income earners who are currently subject to the highest marginal tax bracket; however, certain taxpayers may actually see an increase to their marginal income tax rate depending on their taxable income and filing status. Therefore, now more than ever it is important to consider the taxpayer’s individual circumstances when contemplating year-end tax planning strategies.
Interested in learning more?
Please feel free to contact Robert and/or Seth in our Wealth Strategies group if we can be of any assistance in developing financial planning strategies for you or your clients. Disclaimer: The information above is intended to be solely informational and is not to be construed as tax advice, which should only be provided by a professional tax advisor.