© 2016 by Joan E. Emery
Year-end tax planning for 2016 is more complicated because of the recent presidential election. No one has a crystal ball and so it’s only possible to make educated guesses regarding what the tax future holds. Here’s what is known with some degree of certainty:
1. The federal tax rules for 2016 should be governed by the laws and regulations currently in place.
2. There will probably be significant federal tax law changes in 2017.
3. President-elect Trump and the Republican Congress do not agree on all the tax changes proposed by Mr. Trump.
4. President-elect Trump proposed numerous tax changes during his campaign, including the following:
a. Individual Income Tax Changes – reduce tax rates, fewer tax brackets, elimination of the 3.8% Medicare investment earnings tax, and elimination of the alternate minimum tax;
b. Corporate Tax Changes – reduce maximum corporate tax rate to 15%; and
c. Estate, Gift and Generation-Skipping Transfer Tax Changes – repeal of these taxes, but with elimination of basis step-up at death.
5. No one knows what will happen, but the following federal tax law changes seem likely to occur in 2017:
a. Individual Income Tax Changes – reduced tax rates and elimination of the 3.8% Medicare investment earnings tax;
b. Corporate Tax Changes – significant reduction in the maximum corporate tax rate; and
c. Estate, Gift and Generation-Skipping Tax Changes – other tax changes may take priority over the proposed estate, gift and generation-skipping transfer tax changes. It’s possible that simplification changes will be enacted in this area before or instead of repeal of these taxes.
6. Each person’s tax situation is unique. The following approaches are based on general tax concepts and may not be appropriate for an individual’s particular tax situation. The following are year-end tax planning options which should be evaluated by a tax advisor who is familiar with that person’s situation before implementing:
a. There are two classic year-end tax planning approaches, which may be especially useful for 2016:
1) Postponing income to 2017, to the extent permissible; and
2) Accelerating deductions into 2016, to the extent permissible.
b. Roth IRA conversions are generally more advantageous in a lower tax rate environment, such as is expected for 2017.
c. If a transaction would result in current gift tax being payable, it may be advantageous to structure the transaction to adopt a wait and see approach regarding whether gift tax is repealed.
d. An important consideration may be the impact on proposed transactions of the likely higher interest rates in 2017.
It’s likely that significant federal tax law changes are coming in 2017, but the nature and timing of those changes are unknowable. It is always best to consult your tax advisor before acting.
I am an attorney practicing in the Chicago area.