President-elect Trump is assembling his cabinet and key positions at a break-neck pace. With the Republican House and Senate, Trump should be able to continue this velocity after his inauguration, with swift passage and implementation of many of his policies on his agenda. His tax plan is broad and sweeping. There is no known time frame for passage and the related effective dates, but we will take our best guess, and say that a lot of these tax changes could, in fact, be enacted and even applied retroactively to January 1, 2017.
Following are some tax planning ideas. As with any tax matter, please consult with your tax professional before implementing any significant changes.
Changes Affecting Individuals
The greatest percentage reduction in Trump's tax plan goes to working and middle-class taxpayers:
- Married couples earning $50,000 per year with two children and $8,000 in child care expenses will save 35% from their current tax bill.
- Married couples earning $75,000 per year with two children and $10,000 in child care expenses will receive a 30% reduction in their tax bill.
- Married couples earning $5 million per year with two children and $12,000 in child care expenses will get a 3% reduction in their tax bill.
Planning Opportunity:
- Take as many tax deductions in 2016 as you can. Your deductions will be worth more in 2016 than in 2017, if the tax rates do decrease. If you can pay expenses incurred for your home-based business, for example, on December 31st instead of January 1st, then do so. Payment made via credit card before year end, counts as amounts paid for 2016. Checks postmarked before year end, count toward 2016, as well.
- Since income will be taxed at a lower rate in 2017, it would be wise to delay constructive receipt of income items into 2017. If, for example, you have a choice as to when to receive a bonus, January would be a good option.
The standard deduction will be $30,000 dollars for married couples and $15,000 dollars for single individuals. Most taxpayers will have no need to itemize, simplifying their tax returns and making it easier to file.
Planning Opportunity:
- This more than doubles the current standard deduction. If you were marginally using the itemized deduction calculation before, this change could substantially impact you. If you are a couple or a single individual with a small or non-existent mortgage, and with very little in the way of medical expenses, this effective reduction in the amount of taxable income to you could be very useful.
- Before December 31st, you may want to consider accelerating the items you are currently itemizing into 2016 because you may not need to itemize in 2017. You may want to accelerate your charitable giving into 2016, for instance. If you do have a mortgage, you may consider making January's payment on December 31. If you can deduct your medical as an itemized deduction, consider paying all current bills before December 31. Paying your entire state income tax liability before year-end would also load up your itemized deductions for 2016.
Itemized deductions would be capped at $200,000 for married couples.
Planning Opportunity:
- Accelerating charitable contributions into 2016 may be something you want to consider. You may want to consider paying your 2016 state tax liability before year-end. Itemized deductions not taken in 2016, could be lost by this $200,000 cap in 2017.
Since 1/1/13 with the enactment of the ACA (Obamacare), high-income taxpayers pay an additional 3.8% surtax on net investment income. That means the top federal rate for individuals is really 43.4%. Qualified dividends and long-term capital gains are taxed at 15% or 20%, depending on your income, with the 3.8% additional tax in play here, too.
Planning Opportunity:
- Since Trump's tax plan calls for repealing Obamacare, the 3.8% net investment income tax would be repealed, too. As a result, the new top rate would be 33%, with the top rate on capital gains and dividends a firm 20%.
- If you have an investment with a taxable gain, the timing here is critical. Consider the tax savings by selling it in 2017 versus 2016. Look at the possibility of the installment sale, so as to move some, if not most, of the gain out of 2016, into later years.
Changes Affecting Corporations
The plan lowers the business tax rate from 35% to 15%.
Planning Opportunity:
- As with individuals facing a decrease in income tax rates, cash basis corporations should consider accelerating deductible expenses into 2016, and deferring income into 2017. All businesses may want to look at ordinary and necessary business expenses likely to be incurred in the next three months, and see which ones can be purchased before December 31.
The plan also allows U.S.-based manufacturers to elect full expensing of plant and equipment, an invitation to massive investment. If they elect this approach, they will give up the ability to deduct interest expense.
Planning Opportunity:
- If your manufacturing company is looking at a significant plant and equipment purchase, should that purchase be made in 2017 versus 2016? The interplay of this deduction with the interest expense deduction will require some advanced tax planning with your advisors.
Trump's tax plan includes a 10% tax on repatriation of foreign-earned income, instantly bringing trillions of dollars back into the U.S. economy now parked overseas.
Planning Opportunity:
- A major business opening is at play here. Once monies are repatriated, there would appear to be significant investment areas to be considered. (We assume the states will follow suit with their own repatriation tax rate.) Will you invest in your own property, plant, equipment, and people? Will you invest in other companies via stock ownership or through merger and acquisition? Will you have the cash to begin paying dividends or perhaps buy back your own stock?
Trump's intention is to eliminate costly and unnecessary regulations that prohibit competition with foreign companies.
Planning Opportunity:
- Which of these regulations will most likely be affected and will there be regulations removed which positively affect your company? Will you be ready to jump on the opening markets as they are de-regulated? Will you be ready to move quickly and efficiently?
In General
Economists point out that a direct result of economic stimulation and growth will be a rise in interest rates and an increase in the inflation rate.
Planning Opportunity:
- Most of us have been in an interest rate stupor for the last 8 years. That most probably is about to change. It is a good opportunity to look at your short-term and long-term investments and debt instruments. Rates could rise slowly or they could jump quickly given the prolonged stretch of inactivity due to artificial constraints.
- It might be the time to be 'short' on investment interest rates, and 'long' on the currently low debt interest rates. An evaluation of where you are, and where you think we might be headed, would be time well spent.
In Summary
The Trump tax plan will bring change, and some of it will be huge. Please consult with your tax advisor at Smolin, so that you can make the most out of tax planning opportunities still available to you in 2016.