With the election season of 2016 behind and the calendar year-end quickly closing in, it is time to consider tax planning strategies. Though the election speeches delivered many promises and plans, the actual engineering and design of President-Elect Trump’s tax plan remains to be seen. Despite the uncertainty, there are safe courses of action that taxpayers should consider in light of the GOP controlling the House, the Senate, and the Presidency.
Individual Taxpayer Considerations
Mr. Trump has campaigned on an idea of simplifying the tax code. He advocated certain goals such as lowering income tax rates, combining tax brackets, streamlining deductions, and adopting a more “taxpayer friendly” Internal Revenue Code. The bulk of what the actual plan will be, after input from both Houses, remains anyone’s guess.
Regardless, taxpayers should consider deferring income into calendar year 2017. If Donald Trump is to lower tax rates as promised, then taxpayers may see a drop in their tax bracket from 39.6% to something lower. But, be aware that not everyone stands to win by playing the brackets and deferring income. Under the current plan, a notable loser is someone who is single and makes over $127,500 as he or she will potentially be bumped from a 28% bracket to a 33% bracket under Trump’s proposals. Such an individual may want to consider accelerating income into 2016 where possible.
Capital gains transactions present another conundrum where it may make sense to recognize capital gains in 2016 rather than to defer. One of Trump’s proposals considers making the income tax rates calibrated with the preferential rates given to capital gains, some adjustments were built into the brackets under which certain taxpayers hit the top brackets faster. This results in a more aggressive tax collection scheme against people earning at lower rates. Those who are single with taxable income, after including the gain, greater than $127,500 may wind up paying at 20% on the gain rather than 15%, based on plan proposals.
Finally, taxpayers should consider charitable giving. Charity has long been rewarded with certain tax advantages. However, taxpayers may want to consider planning those donations, especially larger ones, in 2016. The Trump proposal may result in a cap on itemized deductions for high net worth individuals, including charitable gifts.
Estate and Gift Tax Considerations
Sadly, to provide guidance on planning in this area, one must consider how much longer they plan to live. Donald Trump has advocated eliminating the federal estate tax and it remains unknown if his plan involves phasing the estate tax out over a period of time or an immediate repeal. Likewise, the Republican party has long debated the abolition of the federal estate tax. Under President George W. Bush, there was a brief period during which there was no federal estate tax. Further, many states, including Ohio, have already removed estate taxation from their revenue stream. Thus, there is a better-than-average chance that the Republican tax proposals will seek to eliminate the federal estate tax altogether. The future application of gift and generation skipping taxes remain unclear. Under President Bush’s platform, gift taxes survived to prevent the intergenerational transfer of assets to lower income tax brackets. Trump’s plans have yet to address this issue or that of generation skipping tax.
The debate over the proposed §2704 regulations also continues to rage on with no clear-cut answer in sight. These proposed regulations could be withdrawn or substantially modified by the new administration.
Regardless, the only certainties in life remain as death and taxes. And despite the ambiguity of Trump’s plans, no President’s plan survives in perpetuity. Even if Trump repeals the estate tax during his tenure in the Oval Office, someone else may come along and reinstitute it. This uncertainty, however, should not prevent one from taking advantage of the annual $14,000 gift exclusion amount nor from making transfers to charity where possible.
Business Taxpayer Considerations
Most businesses rush at year-end to place assets in service and begin taking the depreciation incentives associated with property, plant, and equipment acquisitions. There are also potential benefits under §179 and the 50% bonus depreciation write-off. However, 2016 presents another planning challenge. President-Elect Trump’s plan proposes allowing a 100% expense deduction for capital asset acquisitions without limit. Holding capital assets until 2017 could produce a huge tax benefit for businesses under Trump if their purchase price is fully deductible.
Mr. Trump’s plan is based largely upon the decrease of federal tax revenue. Any tax reduction, whether it comes from income taxes for businesses or individuals, or transfer taxes such as estate, gift and generation skipping, directly correlates with reduced revenue. Decreased revenue may potentially trigger reduced federal government services. In some cases, state or local authorities may have to become the service provider, which may require changes to state tax codes. Many states and municipalities are currently facing this issue. Alternatively, any necessary services lost may need to be absorbed by taxpayers in the private sector. As always, tax planning will need to stay vigilant to account for future changes. Taxpayers are encouraged to consult with their attorney prior to year-end in order to capitalize upon the opportunities available and to produce the best strategic tax plan.