December 15, 2016. By Olga Okaty:
One of the most prominent topics President-elect Donald Trump discussed on the campaign trail was his plan to cut taxes. Several Republican Congressmen have presented similar tax proposals over the last few years, and with Mr. Trump now in the White House and Republicans controlling both houses of Congress, tax law changes in 2017 seem quite likely.
While details of the various tax proposals from the Republican leadership differ, there are a number of areas that correspond with Mr. Trump’s ideas, including cutting individual income tax rates and reducing itemized deductions.
These potential changes present several opportunities for 2016 year-end tax planning, and we have outlined several considerations below for further discussion with your CPA as you evaluate your particular tax situation.
Deductions: Itemized deductions, which include state and local taxes, charitable gifts, mortgage interest, and medical expenses, provide substantial tax savings for many taxpayers, oftentimes greatly surpassing the standard deduction amounts of $6,300 for single filers and $12,600 for most married couples.
Mr. Trump’s tax plan proposes capping itemized deductions at $100,000 for single filers and $200,000 for married couples, and raising the standard deduction to $15,000 for single filers and $30,000 for married couples. Other Republican proposals suggest eliminating all itemized deductions except charitable gifts and mortgage interest, and some even propose limits on charitable gifts and mortgage interest.
While these changes will potentially make the standard deduction much more attractive for many filers, those who itemize may lose substantial tax buffers and should consider accelerating certain itemized deductions into 2016 while these deductions are still available.
This can be accomplished by:
- Prepaying property taxes in December 2016
- Making your January 2017 mortgage payment in December 2016
- Prepaying estimated state income taxes or any additional amounts that may be owed for the year in December 2016
- Accelerating any medical expenses anticipated in 2017 into 2016
- Accelerating charitable donations into 2016, or establishing a donor-advised fund (which provides donors an immediate tax deduction for 2016 while allowing them to make grant recommendations from the fund over time to any IRS-qualified public charity)
- Gifting long-term held highly appreciated securities in 2016 (thereby claiming a 2016 charitable deduction for the fair market value of the security while avoiding capital gains on its sale); highly appreciated securities can also be placed into a donor-advised fund where they can be sold tax free and distributed to the donor’s preferred charities over time
Income and Capital Gains: With potentially lower tax rates on income and capital gains in 2017, consider deferring sales of securities with high embedded gains into next year. The same deferral strategy may make sense for income which could be diverted to 2017 and possibly benefit from lower income tax rates (Mr. Trump’s plan, if enacted, would reduce the top income tax rate to 33%.)
Consider utilizing any capital losses that are available in your portfolio to offset any realized capital gains. If you have other sources of taxable income, consider generating an additional net capital loss of $3,000, which could be used to offset other types of income, including ordinary earned income for 2016. Always discuss any tax loss harvesting moves with your CPA and investment advisor before implementing any strategies to ensure you are utilizing the best method and timing for your specific tax situation, and that you have a clear plan for re-establishing any positions that may be sold to generate losses.
Other Reminders: Regardless of future tax changes, be sure to take advantage of the following tax moves before year-end to reduce your 2016 tax burden and take full advantage of certain tax breaks that are expiring December 31st
- Maximize pre-tax contributions to your retirement plans, including your 401(k), 403(b), SIMPLE 401(k), IRA, or other retirement accounts. The maximum 401(k) and 403(b) contribution limits for 2016 are $18,000 ($24,000 for taxpayers 50 or older); SIMPLE 401(k) contributions are limited to $12,500 ($15,500 for those 50 or older.) Under certain conditions, contributions to an IRA may be deducted as well ($5,500 for taxpayers under 50, $6,500 for those over 50); contact your CPA to discuss your particular circumstances and if you qualify for an IRA deduction.
- If you had qualified debt relating to your principal residence discharged in 2016, this is the last year you are able to exclude such discharged debt from income.
- This is the last year to deduct qualified mortgage insurance as qualified residence interest.
- Certain energy-related credits, including the Non-business Energy Property Tax Credit, Residential Energy Efficient Property Credit, and Credits for Certain Motor Vehicle-Related Property expire at the end of 2016. Consult with your CPA whether certain home energy efficiency improvements or vehicle purchases you’ve made recently or are planning to pursue in the near future would benefit from these credits in 2016 and should be accelerated.
- Lastly, please be sure to take your annual Required Minimum Distributions (RMDs) from your IRAs if you are over the age of 70½, and take your annual RMDs from your beneficiary IRAs regardless of your age before year-end.
- If you turn age 70½ this year, you have until April 1st of 2017 to take your RMD. However, please keep in mind that delaying your 2016 RMD until 2017 will force you to take two RMDs in 2017. This may very well produce tax savings if tax rates decrease next year, however if tax law remains unchanged, multiple RMDs in one year may inadvertently push you into a higher tax bracket.
We are always available to discuss your particular circumstances and to collaborate with your CPA or tax advisor in designing a thoughtful tax strategy that addresses your specific situation. Please do not hesitate to contact us with any questions or if we may be of assistance.