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Things to do in 2016 in Anticipation of Probable Tax Changes

John J. FureyNovember 23, 2016

Taxes

A client recently asked what actions would we recommend in anticipation of probable changes to the tax rules in 2017 or 2018? Here are some actions to consider.

Changes to the tax code are likely to happen now that the Republicans control the White House and Congress. Changes have been proposed by President-elect Donald Trump and by House Republicans led by Speaker Paul Ryan and Ways and Means Chairman Kevin Brady. Congressional Republicans have been advocating for changes to tax policy for a number of years and now they are in a position to implement them. This blog is based on general tax proposals made by the President-elect during the campaign and on the information on his website and the proposals of Speaker Ryan (click the links for more detail).

Maximize your Deductions in 2016

There are two main reasons to take as many deductions as possible on Schedule A in 2016. One is that your tax bracket is almost certain to be lower under the new rules, which means that the tax savings from a deduction will also be lower. A second reason is deductions are likely to be limited.

Here is a comparison of the current tax rates and the rates under the Trump proposal. The chart uses the current standard deduction and personal exemption amounts for 2016, assuming two exemptions for married filers. A single taxpayer gets a standard deduction of $6,300 and a personal exemption of $4,050. Married taxpayers, assuming no dependents, get a standard deduction of $12,600 and personal exemptions of $8,100. The Trump proposal includes a standard deduction of $15,000 for a single person and $30,000 for married filers. It eliminates personal exemptions.

Single Married Current Ordinary Income Tax Rates Trump Proposal
$0 – 10,350 $0 – 20,700 0% 0%
$10,351 – 15,000 $20,701- 30,000 10% 0%
$15,001– 19,625 $30,001 -39,250 10% 12%
$19,626 – 48,000 $39,251 – 96,000 15% 12%
$48,001 – 52,500 $96,001 – 105,000 25% 12%
$52,501 – 101,500 $105,001 – 172,600 25% 25%
$101,501– 127,500 $172,601 – 252,150 28% 25%
$127,501– 200,500   28% 33%
  $252,151 – 255,000 33% 25%
$200,501 – 423,700 $255,001 – 433,750 33% 33%
$423,701 – 425,400 $433,751 – 487,650 35% 33%
Over $425,400 Over $487,650 39.6% 33%

 

For example, if you are in the 39.6% tax bracket in 2016 a deduction of $10,000 results in tax savings of $3,960. If the Trump proposal is approved for 2017 your $10,000 deduction will result in tax savings of only $3,300. This may be a good year to consider making a large deduction to a charitable donation fund. You can take the tax deduction in 2016 and you can disperse the funds to charities in later years. Here is information about donor advised funds

The Trump plan would limit itemized deductions to $100,000 for single taxpayers and $200,000 for married taxpayers. The plans proposed by Ryan and Camp would eliminate all itemized deductions other than ones for charitable gifts and mortgage interest. The deduction for state and local taxes may be eliminated, so 2016 would be a good year to make sure that you pay any balances due before December 31, 2016.

Wait until New Tax Rules are Effective to Generate Capital Gains

If you have the ability to wait to generate capital gains, you should wait until the new rules are effective. The Net Investment Income Tax (NIIT) of 3.8% is likely to be eliminated. If you have investment income (includes capital gains) and your Adjusted Gross Income is over $200,00 (single) or $250,000 (married), you will pay the NIIT in 2016, in addition to the regular capital gains tax rates. Another reason to wait for the new rules is that they may raise the income threshold at which the initial capital gains rate of 15% takes effect.

Here is a comparison of the current capital gains rates and the rates under the Trump Proposal. The chart uses the current standard deduction and personal exemption amounts for 2016, assuming two exemptions for married filers.

Single Married Current Capital Gains Tax Rates Trump Proposal
$0 – 48,000 $0 – 96,000 0% 0%
$48,001 – 52,500 $96,001 – 105,000 15% 0%
$52,501 – 101,500 $105,001 – 172,600 15% 15%
$101,501– 127,500 $172,601 – 252,150 15% 15%
  $252,151 – 255,000 15% 15%
$127,501– 200,500   15% 20%
$200,501 – 423,700 $255,001 – 433,750 15% 20%
$423,701 – 425,400 $433,751 – 487,650 15% 20%
Over $425,400 Over $487,650 20% 20%

 

If you have any questions about tax deductions, capital gains or other tax issues, please call our office at 610-651-2777.  We are happy to help!

Other Sources:

Your Taxes Are About to Change-Perhaps Not the Way you Think,  The Wall Street Journal, November 10, 2016, Laura Saunders

Maximize Your Deductions Now. A Trump Presidency Means You Could Lose Them, The Wall Street Journal, November 18, 2016, Laura Saunders