Planning for Possible Tax Law Changes After 2016

Pres.-Elect Trump has stated that a major tax bill lowering taxes is one of his top three priorities.  In addition, House Republicans have readied major tax reform proposals.  It seems clear that changes will happen as soon as 2017.  Although we don’t know the specific details of what will be enacted, we do know many of the proposals, and taxpayers should act in the remaining days of 2016 to garner tax savings.  Some of the more significant possible changes, and relevant ways to reduce your taxes, are listed below.  The planning ideas below are general in nature.  Your specific tax situation might call for different action.  Actual tax changes may differ from proposals.  You should work with your tax preparer to project your 2016 and 2017 income taxes so that the proper actions for your circumstances can be taken.

1.      Reduction of the top ordinary individual income rate to 33.0% from 39.6% (long-term capital gain and qualified dividend rates are proposed to remain the same).

a.      Defer income to 2017 when it will be taxed less at the lower rate.

                                                              i.      Defer a December bonus to January.

                                                            ii.      Exercise non-qualified stock options after 2016.

                                                          iii.      Cash basis businesses whose profits are taxed in your personal tax return can delay billings until late December so that collections are received in January.

                                                          iv.      Those attaining age 70 ½ in 2016 can defer their first required minimum distribution from IRAs or other retirement accounts until as late as April 1, 2017, although that means two RMDs will be received in 2017.

                                                            v.      Defer taxable Roth IRA conversions to 2017.

b.     Accelerate deductions to 2016 when more taxes will be saved at the higher rate.

                                                              i.      See discussion below for ideas on prepaying itemized deductions.

                                                            ii.      See discussion below for business deduction strategies.

c.      Note that because of the differences in rate bracket amounts between current law and proposed law, those in certain lower brackets of taxable income may experience a tax rate increase from 2016 to 2017.

2.      Repeal of the Affordable Care Act (Obamacare) net investment income tax (NIIT) of 3.8%.

a.      Defer the recognition of 2016 investment gains until 2017.

b.     Harvest capital losses to offset any recognized 2016 capital gains.

                                                              i.      Be careful to avoid the wash-sale rule when reinvesting proceeds.

c.      Defer cashing in U.S. savings bonds.

3.      Increase in the standard deduction to $30,000 for joint filers and $15,000 for singles, up from $12,600 and $6,300 respectively.

a.      If your total itemized deductions are not much more than the new limits, prepay some of your 2017 itemized deductions in 2016 to avoid losing tax benefits.

                                                              i.      Prepay several years of charitable contributions.  Establish a donor-advised fund to receive your donation if you are not prepared to give the funds to specific charities now.  Donating long-term appreciated capital assets doubles the tax benefits by eliminating the tax on the unrealized gain.

                                                            ii.      Prepay any 2016 state income taxes that would be due with your tax return in April 2017 (assuming you are not subject to the AMT).

4.      Cap the total amount of itemized deductions to $200,000 (joint)/$100,000 (single).

a.      If your total itemized deductions exceed these limits, prepay your 2017 itemized deductions in 2016 as discussed above.

b.     Furthermore, if you have considered making a substantial charitable contribution sometime in the near future, 2016 may be the year to do so to avoid losing the tax deduction if the cap is indeed imposed on charitable donations.

5.      Repeal of the alternative minimum tax (AMT).

a.      Defer to 2017 items that typically cause AMT.

                                                              i.      Payment of state and local tax.

                                                            ii.      Exercise of incentive stock options (ISO).

b.     If you are subject to the AMT and the AMT exemption has been fully phased-out, your marginal tax rate on ordinary income would increase from 28% in 2016 to 33% in 2017.

                                                              i.      Accelerating 2017 non-investment income (because of the NIIT) into 2016 will save tax.  Examples are exercising a non-qualified stock option or making a Roth IRA conversion.

c.      If you are subject to the AMT and the AMT exemption is in the process of being phased-out, your marginal tax rate on ordinary income would decrease from 35% to 33%.

                                                              i.      Prepaying charitable deductions or other deductions permitted under the AMT would save taxes at a slightly higher rate within the AMT exemption phase-out range of income.

6.      Repeal of the 40% tax on estates over $5.45 million (per individual).  Imposition of a capital gain tax at death for estates valued over $10 million (it is unclear whether this limit is per individual or per married couple, and whether it is an actual tax at death or if it is simply the loss of tax basis step-up to the value at death).

a.      This proposal is a difficult area to plan for because a person’s life expectancy will most likely extend beyond the president-elect’s term in office, and a future administration/Congress could reenact the estate tax.

b.     It is also difficult to plan for because we don’t know whether the current rules allowing a step-up in tax basis to fair market value at death will be continued.

c.      Taxpayers currently planning to make gifts to beat the effective date of proposed regulations that substantially eliminate valuation discounts are in a tough position, as the regulations may not be finalized.

d.     It seems that a “wait and see” approach may be best before undertaking irrevocable planning strategies before we know what the rules will be.  You should discuss your individual circumstances with your estate planner to decide upon the most prudent course of action (or non-action).

7.      Reduction of the C corporation top tax rate from 35% to 15% (Trump) or 20% (House)

a.      Deferring taxable income to 2017 will result in permanent tax savings.

b.     Accelerating deductions to 2016 will likewise result in tax savings.

                                                              i.      Electing to expense certain asset acquisitions placed in service in 2016 under Section 179 may be advisable.

                                                            ii.      Review the purchase of low-cost assets to be sure they are expensed under your capitalization policy rather than recorded as depreciable assets.

                                                          iii.      Consider whether the “partial disposition” rules might apply to a significant improvement made during the year, such as the replacement of a roof.