December is quickly coming to a close, along with our final chance to do any significant tax planning before year-end. There are a number of proposals on the table for 2017 from Republicans and President-Elect Trump (proposed tax reforms) that could have “yuge” implications for 2016 year-end tax planning.
One of Mr. Trump’s prominent proposals, as well as the House Republicans, is to simplify the tax brackets from the current seven tiers down to just three: 12%, 25%, and 33%. Such a change will likely mean lower tax rates for most people, but there are instances where individuals could face higher tax rates according to research recently published by Michael Kitces.
As stated by Mr. Kitces, “the areas in green are income levels that would see a decrease in tax under President Trump’s proposed reforms, while the red zone would see a modest increase (and the remaining income levels would simply pay the same rate they do now)”.
The same applies to couples filing jointly, albeit with a far greater positive impact than for individual tax payers.
Another proposed tax reform by both the Republicans and Trump, is to nearly double the standard deduction for both individuals and married couples (currently at $6,300 and $12,600 respectively) and to possibly eliminate or put a cap on itemized deductions.
With these potential tax changes in mind, below are a few things you can do to plan for the new year.
For those who are in the “green zone” mentioned above, it will be beneficial to defer as much income as possible since you may face lower taxes next year. Some possible ways to defer income are:
- Wait to take withdrawals from an IRA until next year
- If you turned 70 1/2 in 2016, wait until January to take your first required minimum distribution
- Wait to do any Roth conversions until 2017
If you fall into one of the “red zones”, you will benefit from accelerating income in 2016. You can do this by:
- Partial Roth conversions to fill up you current tax bracket
- Increase IRA withdrawals
- Realize short-term capital gains
It may be advantageous to take some of next year’s deductions before the end of 2016. If tax rates are lower next year, tax deductions will be less valuable, and certain itemized deductions may no longer even exist at all! Common items that can be pushed into the 2016 tax year are:
- Charitable gifts
- Property taxes
- State taxes
- Medical expenses
- Business expenses
While nothing is set in stone yet, the proposed reforms give us a starting point for tax planning going into 2017. No matter what you potentially face net year, be proactive and reach out to your tax advisor to find ways you can tax advantage of President-Elect Trump’s proposed tax reforms.
Patrick Daniels is the Financial Planning Analyst at Precedent Asset Management, serving clients as a fee-only advisor in the Indianapolis, Indiana area and nationwide, through coordinated financial planning and investment management.