When that first leaf changes color, there’s a nip in the air, and the sunshine starts to fall into corners it did not before, you know the year is coming to an end. Typically that is when I start getting phone calls for year-end tax planning.
This year has been tumultuous, to say the least, as we recover from all the pre- and post-election trauma or elation depending on which candidate you favored. We need to put our tax plans in place based on what we know about likely tax changes for 2017 and 2018.
Most tax planning usually starts with identifying the need to either postpone income and accelerate deductions if you think you are going to be in a lower tax bracket in the coming years OR to accelerate income and postpone deductions if your income is going to increase. And then we look into your withholding and taxes, your employer retirement contributions, etc.
Filers who claim itemized deductions on their taxes are the ones who have the flexibility in shifting deductions. For example, one can send in the last estimated tax check before December 31st to claim the deduction in the current year. A mortgage payment for January can be made in December and your charitable contributions for 2017 can be moved back as well.
If your total medical expense for any reason is over 10% of your AGI, you can have any elective procedures before December 31st so you will be eligible for the tax write-off as well. This is especially very important if you are 65 years of age or older since the special 7.5% medical cost threshold is gone for the Tax Year 2017 and you get the same 10% medical cost threshold as the rest.
If you are going to have a spike in income and that is going to put you into the Alternative Minimum Tax category, the planning of deductions will change.
Now would also be a good idea to look into Capital Loss Harvesting or Tax Loss Harvesting and see if that will be a right strategy for you. The basic premise of this fancy term is that you sell off your low-yield investments or those that have lost value to off-set the gain(s) from the sale of those that increased in value. This is a risky strategy, so you should have your tax professional or financial advisor weigh in for you.
Speaking of tax planning for the coming years, we must take into reckoning some important points from President-Elect Trump’s proposed tax plan. These proposals stand a very high chance of passing since both the House and the Senate are in Republican hands and they have been itching for tax reform. From many accounts and experts weighing in, these plans, if implemented, will reduce revenue by an estimated $7.2 trillion in the first decade and as a result deficit is expected to increase as well.
Proposed Tax Plan from President-Elect Trump:
- Tax brackets reduced to three: 12%, 25%, and 33%.
- Elimination of:
Alternative Minimum Tax
Head of Household filing status
Net Investment Income Tax
- Business tax rate lowered to 15%.
- Cap on itemized deductions at $100,000 for single filers and $200,000 for married filing joint.
- Standard deduction $15,000 for single filers and $30,000 for married filing joint.
- Low-income families get a credit up to $1200 a year for child-care costs.
- Carried interest is taxed at ordinary tax rates instead of capital gains rates.
Based on the above, 2016 would probably be a good year to accelerate your charitable contributions. This is especially true if you are in a higher income tax bracket, the percentage of savings is higher as well. Donating appreciated stock to a tax-exempt charity is also a good way to increase your itemized deductions.
We do not know yet how the GOP will go with the proposals, please check with your Enrolled Agents and make sure advice is tailored to your unique situation.