December 16, 2016
With the Republicans controlling both Congress and the White House, individual income tax changes that could potentially reduce your tax bill are widely expected. But that doesn’t mean you shouldn’t do your regular year-end tax planning.
Both President-elect Donald J. Trump and House Republicans call for a 33% maximum ordinary tax rate and a 20% maximum capital gain rate. They both want to repeal the Net Investment Income Tax and Alternative Minimum Tax. And they agree on increasing the standard deduction and no personal exemptions.
However, they also want to cap itemized deductions. While Trump favors a monetary cap of $100,000 per taxpayer, House Speaker Paul Ryan wants to limit deductions to mortgage interest and charitable contributions only.
Even though the differences in the details still need to be hashed out, it clearly appears that the traditional tactics of deferring income into next year and accelerating deductions into this year remain as important as ever to use as 2016 comes to an end.
Since both Trump and House Republicans pledge to eliminate the 3.8% Net Investment Income Tax, deferring investment income makes sense. Here are a few common investment income deferral strategies:
If you’re a saver, you can enhance your investment returns by taking advantage of the variety of tax-deferred savings accounts that are available.
Republican proposals for future limitations on itemized deductions make it even more important to determine whether charitable pledges and goals should be accelerated into 2016. Gifts of appreciated stock offer the dual benefits of shielding the unrealized gain from tax while, at the same time, providing an income tax deduction for the same amount.
Taxpayers who discover that their estimated taxes are underpaid for any of the first three quarters of the year may have the ability to cure the shortfalls by increasing withholding before year-end.
In addition to increasing the withholding rate on bonus compensation or that final paycheck of the year, you may be able to use eligible rollover distributions from a qualified retirement plan to meet the withholding target. If you ask your IRA custodian to distribute the funds to you directly, the firm will automatically withhold taxes at a standard rate. You can then use other money to meet the required IRA rollover contribution of an equivalent amount within 60 days of the distribution.
Although 2016 is rapidly closing on us, there’s still time to make changes to help minimize your tax bill for this year and next. In addition to what I’ve outlined above, there are other potential strategies. Your independent financial advisor can recommend the options that may work best for you (which you should confirm with your tax professional) and then help you execute them, so you can focus on family and fun this holiday season.
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