As we enter into a new holiday season, we at Pauley Financial also enter into "Tax Planning Meeting Season". While you might be thinking, "Wow...I can hardly wait...", and it may sound like as much fun as going to the dentist (sorry Dentists!), we believe these meetings do provide substantive financial planning opportunities for our clients. And, while no one will argue that the family gatherings with eggnog and holiday cheer are indeed more fun, we have yet to hear any complaints on lowered tax liabilities when April 15th rolls around. Our goal is to work in partnership with your Tax Preparer so that we may leverage every opportunity to minimize your current and/or future tax liability.
As we enter this round of tax strategy meetings, the administration-elect has certainly offered a preview of possible tax law changes. While no one knows for sure what our 2017 tax code will look like, outlined below are hints at what we might expect, and how you might best prepare should these changes go into effect. The first 100 days will be important, and we expect President-elect Trump will try to fulfill as many of his campaign promises as he can during the “honeymoon” period.
In looking ahead at possible tax law changes, what year-end measures should you be weighing?
- Tax Bracket changes. Mr. Trump has proposed three brackets instead of the current seven. For many, this will mean the same or lower Tax Rate on their Taxable Income.
- Taxable Income would change as well under the Trump proposals in that the Standard Deduction would increase appreciably. To the extent that it isn’t offset by the proposed limits on itemized deductions and the elimination of Personal Exemptions, taxable income should decrease along with the rates.
- Under the plan, the Alternative Minimum Tax (AMT) and the Net Investment Income Tax (NIIT) would also be eliminated.
- People would no longer be allowed to deduct a Charitable Donation of the full market value of Appreciated Assets.
Some ideas to prepare:
- The simplest is to shift income from calendar 2016 into calendar 2017, and aggregate as many losses and deductions as you can into calendar 2016.
- You might also find a Roth Conversion to be suddenly less advantageous – at least, temporarily. Why? If rates in the future are lower than rates today, it would be more expensive to pay ordinary income tax on the amount converted today than it would to pay taxes at the future lower rate.
- A better strategy might be to wait and see if President Trump does give us lower tax rates, and then consider a Roth Conversion during that window.
- If planning to Gift Appreciated Securities to Charity, do it before 12/31/16.
Meanwhile, the Trump plan would repeal the Estate Tax altogether, but any Capital Gains cumulatively above $10 million would be taxed and no step-up in basis, with Exemptions for Small Businesses and Family Farms. For people who are looking at paying estate taxes someday, the best advice may be to wait and see. This provision, if enacted, could open a window for individuals to transfer their wealth to heirs tax-free before some future administration decides to reinstate estate taxes.
In addition to the personal tax changes, Mr. Trump will likely seek to decrease Corporate Taxes. This should be beneficial to US-based businesses and their stock prices. With the US having one of the highest corporate tax rates, this move should also keep more businesses “home” instead of looking ways to move their profits offshore. Doing so, it is hoped, will actually cause a net increase in corporate taxes paid.
During every U.S. presidential election season, at least one candidate vows to repeal carried interest deductions. Meanwhile, venture capitalists do their part and argue against it. The issue is near and dear to their hearts because carried interest treats investment partners’ salary as an investment and not income, taxing it at long-term capital gains rates and not as ordinary income (which is taxed more heavily). Many VCs also believe they deserve the tax break for taking risks and holding on to assets for what often becomes many years on end. In this election, both candidates took on this issue.
So, we will all do our best managing with the information that we know now, and be prepared to adjust as "life happens" (in this case, "tax code change happens"). As always, we look forward to any feedback you may have, and send wishes for a peaceful and joyous Thanksgiving.
Posted on Tue, November 22, 2016
by Kimberly Pauley filed under