Part of the Political Issues and Policies Special Report
The election of Donald Trump, in addition to Republican control of the House and Senate, bodes well for significant tax reform during early 2017. For some people, this can present major opportunities for reducing taxes for 2016 by making some key year-end tax planning moves.
Reductions in individual tax rates are likely next year: Trump has advocated for three income tax rates of 12 percent, 25 percent and 33 percent. So be strategic and take advantage of the fact that deductions are more impactful now when tax rates are higher and gains will be less costly next year when tax rates are lower.
Here are six strategies you may want to consider for year-end moves and for delaying some transactions until 2017 to keep your tax bills down:
1. Accelerate your income tax deductions into 2016. Tax reform legislation could be retroactive to January 1, 2017. Therefore, pay any fourth-quarter estimated taxes in December, make your January mortgage payment in December and deliver your 2017 charitable donations in 2016. Deductions that you would typically take in January have greater value if you use them in December when there’s likely to be a higher tax rate in effect.
Deductions that you would typically take in January have greater value if you use them in December when there’s likely to be a higher tax rate in effect.
2. Make gifts to charities and family foundations with appreciated assets in 2016. Donate as much as you can before year-end – and do it with stock that has gone up in value. That way you’ll get the maximum deduction for 2016.
3. Harvest tax losses in December to offset the year’s capital gains. If you own mutual funds, you may see some capital gains distributions from them near the end of the year. Reduce those gains as much as you can in 2016 by selling losing investments, since the gains will likely deal a bigger tax blow in 2016 than 2017. The tax savings can offset your gains.
4. Distribute income from trust and estate accounts in 2016 to lower income tax liability. Estates and trusts are taxed at the highest income tax rate; therefore, it may make sense to distribute income to beneficiaries to be taxed at the beneficiary’s lower income tax rate. Don’t miss the opportunity to pass the trust income to beneficiaries who are at a lower tax rate in 2016 because you believe the tax rate for them will be lower in 2017.
5. Postpone receipt of income to 2017. If you’re self-employed or run a small business, delay year-end billings by sending invoices in late December so you won’t receive the funds until early January. That way, you’ll be taxed on the income at your 2017 tax rate.
6. If you own a business, hold off on buying any more capital assets for it until 2017. Under Trump’s proposal, you’ll be able to write off the entire purchase in the year you buy it, rather than claim depreciation over a number of years — through what’s known as expensing.
All in all: Think ahead and play smart to protect your wealth, whether humble or huge.