We now have a President-elect, Donald Trump, and with the election comes the promise of changes galore, including significant modifications to the Tax Code. Trump’s changes, assuming they are adopted, afford us an opportunity to do some serious tax planning.
For as long as we have been in businessr, we have been telling people that the primary argument in favor of Roth IRA conversions is very likely wrong. Perhaps the primary justification for the conversion goes something like this, “Income tax rates are likely to be higher in retirement than they are now.” I have long disagreed with this analysis, because most of the serious tax change proposals have involved lower marginal tax rates, with less deductions. So it is with the Trump Plan.
In the Trump Plan, 7 current tax brackets, ranging up to 39.6%, would be replaced by only 3 tax brackets, topping off at 33%. Also, the 3.8% ObamaCare tax on investment income would be repealed. Therefore, if you are earning a lot of money and/or have significant investment income, 2017 would likely produce a lower tax rate.
Small business owners, who often have the ability to legally minimize their company income, should delay billing and/or accelerate expenses. The Trump Plan promises that a dramatically lower (15%) business tax rate will apply to all businesses, great and small. With the Trump Plan, everything that can be done reasonably to delay income would result in a lower rate.
From the tax-deductible expense side, it pretty much works in reverse. Claiming expenses this year may be more valuable than putting off purchases and/or payments to 2017. This does not only apply to tax rates. The very deductibility of some items is in question for 2017 and beyond. State and local income taxes, and their Florida counterpart, the sales tax deduction, may go away under the Trump Plan. This means that a big purchase, such as a car or truck, a boat, home remodeling, or an RV, may be more valuable in 2016 than in 2017 due to the sales tax deduction. Perhaps it is a good idea to buy now, rather than later.
Many people who currently itemize deductions on their tax returns may not derive any benefit from doing so in 2017. In the Trump Plan, the Standard Deduction is being increased sharply for all taxpayers. This is part of the long-awaited elimination of the so-called marriage penalty, which disappears in the Trump Plan.
If you don’t expect to be able to itemize deductions in 2017, you may want to pay property taxes in 2016. You may also want to pay your January mortgage payment in December, 2016. Making charitable deductions may be more valuable in 2016. Outstanding medical expenses could be paid this year to increase deductions.
Plan now for the probability of changes coming in 2017. There may be money in it for many of you.