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2016 Year-End Tax Planning for Individuals

November Election Results

Just as this newsletter was going to press, the results of the November elections became evident. Donald Trump became President-elect and the Republicans maintained control of the House with 239 seats and the Senate with 51 seats. Although compromise with Democrats will still be required in the Senate where 60 votes are often needed to bring legislation to the President for consideration, the likelihood is great that significant tax changes could result. Thus, as you read this newsletter please keep in mind that 2017 could be a remarkable year for tax law changes. Such changes could materially alter behavior concerning how businesses and individuals structure their financial affairs to maximize net worth and revenue after taxes. Because of the necessary give and take required to obtain a tax bill that passes both houses of Congress, the ability to predict with certainty the contents of broad based tax legislation is impossible. Nevertheless, President-elect Trump’s tax plan may provide some insight as to the likely direction such tax legislation might take. Some of the aspects of his plan include:

  • Repeal of estate, gift and generation skipping transfer taxes;
  • Three ordinary income tax rates of 12%, 25% and 33%
  • Three long term capital gains tax rates of 0%, 15% and 20%
  • Repeal of the alternative minimum tax
  • Repeal of the 3.8% net investment income tax
  • Cap itemized deductions for married filing joint taxpayers to $200,000 and for single taxpayers to $100,000
  • Carried interests will be taxed as ordinary income
  • Business tax rates would be lowered from 35% to 15%
  • Deemed repatriation of corporate profits held offshore at one-time rate of 10%

Considering these possibilities, you might want to consider:

  • Accelerating deductions into 2016. Consider, for example making 2016 contributions to private foundations or donor advised funds and paying property taxes in 2016 instead of 2017.
  • Deferring capital gains and the exercise of incentive stock options (ISOs). Weigh the potential market risk with the potential for tax rates in 2017.
  • Restructuring holdings in 2017 to take advantage of the potentially lower business tax rates.
  • Waiting on gift planning.

2016 Versus 2017 Marginal Tax Rates

Whether you should defer or accelerate income and deductions between 2016 and 2017 depends to a great extent on your projected marginal (highest) tax rate for each year.

The highest marginal tax rate for 2016 and 2017 is nominally 39.6%, but certain provisions that reduce deductions as income increases may also increase the effective marginal tax rates slightly. Also, an additional 3.8% tax on unearned income of high-income taxpayers applies for taxable years beginning after December 31, 2012. The tax brackets for 2016 and 2017 are included in this Tax Letter (see page 3). Projections of your 2016 and 2017 income and deductions are necessary to estimate your marginal tax rate for each year.

Shifting Income and Deductions Into the Most Advantageous Year

You can shift taxable income between 2016 and 2017 by controlling the receipt of income and the payment of deductions. Generally, income should be received in the year with the lower marginal tax rate, while deductible expenses should be paid in the year with the higher marginal rate. If your top tax rate is the same in 2016 and 2017, deferring income into 2017 and accelerating deductions into 2016 will generally produce a tax deferral of up to one year. On the other hand, if you expect your tax rate to be higher in 2017, you may want to accelerate income into 2016 and defer deductions to 2017.

We have only discussed a few items here to assist you in your annual tax obligation. Click Download Article for the full Tax Alert.

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