After 2016 Election Year-End Tax Planning
November 30, 2016
By Ed Labanara
Typically, year-end tax planning advice expounds the virtues of accelerating deductions in the current year and deferring income or stock market gains when possible and economically viable. With the prospect of GOP control of both houses of Congress and the Presidency, coupled with their stated goals of tax reform, this strategy makes even more sense. There is a strong likelihood that income taxes will drop and capital gains treatment will be more favorable.
Both the House GOP and President-elect Trump have emphasized tax reform as a major goal. A common theme in this version of tax reform involves both significant tax simplification and reduction of marginal rates for C corporations, individuals and even income from pass through entities (partnerships, LLC’s and S corporations). For individuals in the top marginal 2016 federal income tax brackets (which can be as high as 44%) the economic value of deductions taken in December of 2016 versus 2017 could be significant.
It’s hard to predict with absolute certainty but typical items such as payment of real estate taxes, sales tax, state and local estimated tax payments and charitable contributions may be worth 10%-15% more on the dollar by paying forward in December versus in 2017. Conversely deferring gains on the sale of equities, bonds and property, or just deferring income in general will most likely prove beneficial. Accelerating and recognizing any portfolio loss positions should also result in more after-tax savings.
A proposal put forth by both the House and President-elect Trump includes:
>Simplified individual tax brackets of 12%, 25%, and 33%.
> Eliminating or limiting the amount of charitable deductions. > Total repeal of the 3.8% net Investment income tax imbedded in the Affordable Care Act on certain income, gain or pass through income. > Reduction of the long term capital gain tax rate from 20% to 15%. > Exclusion up to 50% from tax for certain investment income, interest, dividends and capital gains. > Repeal of Federal Estate tax and Gift tax. State of Washington Estate and Gift tax would continue to apply. > Reduction of C corporation top tax rate from 35% to 25%. > Repeal of itemized deductions for taxes (sales tax, state and foreign income taxes). Two versions of the GOP plan allow only mortgage interest and charitable contributions as itemized deductions. > A significant in the individual standard deduction making itemized deductions less attractive to taxpayers $15,000 for individuals and $30,000 for couples under President-elect Trump’s plan. > President-elect Trump’s plan puts a $100,000 cap for singles and a $200,000 cap for couples on total itemized deductions. Each individual or business entity must decide based on their unique situation whether or not to implement specific year-end strategies. Accordingly, it could be extremely helpful to consult with your CPA now about how potential changes might impact you.
Ed Labanara, Jr
Seattle Asset Management is a Registered investment Adviser that has been in continuous operation for over 20 years. Ed Labanara is the founder and has been the portfolio manager throughout that time. Our focus is on wealth preservation and absolute returns for individuals, retirees, trusts, and endowments. Returns have been excellent for both our main products, Flexible Balanced Accounts and Equity Accounts. Information about our firm is available at seattleasset.com.
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