Key Tax Strategies for 2017

Tax changes could be significant under new laws. Important steps you can take now to prepare.

12.23.2016 - Craig Richards, CPA/PFS, CFP

The tax reforms proposed by President Trump and the House GOP are still preliminary; however, it is widely believed that the US will see changes in the tax landscape and that these changes will result in overall lower taxes.

The Likelihood of Tax Changes Is High
Trump has stated that taxes are one of his top priorities.

House Republicans released their blueprint of tax reform back in June, 2016. Some of Trump’s proposals are identical and overlap with that plan, while others are much different. Although seats were lost by the GOP in both the House and the Senate, Republicans hold the majority in both, yet short of the 60 required in the Senate to avoid a Democratic filibuster. Democrats may be willing to negotiate now as opposed to risk losing more seats in the Senate during the next round of elections in 2018.

An unpreferred outcome for all parties would be to have the changes they implement sunset in 10 years, as was the case with some of the Bush-era policies. It is believed that Republicans will move toward permanent changes that are revenue-neutral. However, because of the uncertainty of some of Trump’s proposals, it is difficult to know what the actual costs might be.

A Simplified Tax Landscape
The good news is in any scenario, the proposed tax changes would greatly simplify the tax landscape. Trump has proposed trimming the number of personal income tax brackets from seven to three, capping capital gains taxes at 20% and eliminating the estate tax. Deductions may be limited, which, while simpler, would disproportionately affect high-income earners.

Key proposed changes include:

Income tax: Reduce the number of tax brackets from seven to three, and lower the top rate to 33%. Itemized deductions: Limit deductions to $200,000 for joint filers and $100,000 for single filers under Trump’s plan.

Healthcare tax: The proposal to repeal Obamacare could eliminate the 3.8% net investment income tax as well as the 0.9% Medicare hospital insurance tax.

Capital gains tax: Long-term capital gains and qualified dividends could be capped at 20% under Trump’s plan. The GOP’s plan would tax gains at ordinary rates with a 50% exclusion (50% of the top rate of 33%, which works out to 16.5% maximum).

Estate tax: Trump and the GOP both support repealing the estate tax. Trump’s plan calls for a capital gains tax on estate assets over $10 million.

Furthermore, Trump has proposed reducing corporate taxes from 35% to 15%, providing repatriation of corporate profits held offshore at a one-time rate of 10%, pass-through entities to also be taxed at 15% and carried interest income, now taxed as capital gains, to be taxed as ordinary income.

Key Tax Strategies to Consider in 2017
What does all of this mean and what, if anything, should be considered in the new president’s first year in office? It is expected that we could see many of these and other items take shape in the first quarter of the New Year.

To that end, we believe current tax liabilities will be reduced for many taxpayers beginning in 2017. We continue to advocate for a traditional tax-planning approach. This includes seeking to reduce current taxable income by postponing income where possible, and accelerating deductions.

1. Postpone income to future tax years.
If possible, postpone income into future tax years. This includes deferring lump-sum income such as bonuses or the sale of a business and postponing capital gains or stock options into a future tax year.

2. Give to charity—especially appreciated assets.
Consider using appreciated assets instead of cash when planning for your charitable gift giving. The full fair market value of the property you give away can be claimed as a tax deduction, even if you will be limited in the amount of deduction you can take in a given year.

3. Realize losses.
While we never recommend making portfolio decisions for tax reasons alone, if you are planning on selling a security, selling at a loss in the current year rather than waiting until the next tax year can help offset gains and reduce your taxable income. Also, be sure to use any carryover losses from a prior year to further offset gains in the current year.

4. Donate IRA distributions directly to charity.
Instead of receiving IRA distributions directly, consider donating them to charity. If you are over age 70½ and taking required minimum distributions from an IRA, you are allowed to transfer up to $100,000 directly to qualified charities. If the transfer is made properly, that $100,000 will not be considered income or a deduction for federal tax purposes.

5. Consider undoing 2016 Roth IRA conversions.
If tax rates go down in 2017, you have an opportunity up until October 15, 2017 to undo a 2016 regular IRA-to-Roth conversion. You can then redo that conversion while being taxed at a lower rate.

6. Trusts still matter.
Even if the estate tax is eliminated, trust creation still has many benefits, most importantly asset protection.

A Transitional Year
Although the election is behind us, what is to come of this administration is unknown. During what will most likely be a transitional year in many respects—perhaps with immediate change in tax policies—we will continue to monitor the pulse of Trump’s tax proposals.

View Our Full 2017 OUTLOOK

This communication is intended solely to provide general information. The information and opinions stated are as of December 2016, and may change without notice. The information and opinions do not represent a complete analysis of every material fact regarding any market, industry, sector or security. Statements of fact have been obtained from sources deemed reliable, but no representation is made as to their completeness or accuracy. The opinions expressed are not intended as individual investment, tax or estate planning advice or as a recommendation of any particular security, strategy or investment product. Please consult your personal advisor to determine whether this information may be appropriate for you. This information is provided solely for insight into our general management philosophy and process. Historical performance does not guarantee future results and results may differ over future time periods.

IRS Circular 230 Notice: Pursuant to relevant U.S. Treasury regulations, we inform you that any tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. You should seek advice based on your particular circumstances from your tax advisor.


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