This week and next week we will take a look at President-elect Trump’s tax plan. He declared that, “a major tax bill lowering taxes in this country” would be one of his top three priorities. Middle and upper-income taxpayers, who may be betting he can deliver on this promise, should revisit their year-end tax moves to make the most of what might be windfall savings next year.
Please remember that nothing he has proposed is guaranteed to happen.
The Trump tax plan would feature three tax brackets instead of current law's seven. The top tax rate would lower to 33% from the current law's 39.6%. The upshot of these and other tax-reduction changes, if retained in the final tax plan, would be reduced taxes for middle and upper-income taxpayers, with the biggest tax savings for the wealthiest taxpayers.
Here Are Some Things You Can Do to Defer Income until 2017
•Hold off on billing. Income that a cash basis taxpayer earns by rendering services isn't taxed until the client, patient etc., pays. If the taxpayer holds off billing until next year—or until so late in the year that no payment can be received in 2016—he will succeed in deferring taxable income until next year.
•Defer “first year” required minimum distributions (RMDs) from an IRA or 401(k) plan (or another employer-sponsored retirement plan). RMDs from IRAs must begin by April 1st of the year following the year a taxpayer reaches age 70-½. Although RMDs must begin no later than April 1st following the year in which the IRA owner attains age 70-½, the first distribution calendar year is the year in which the IRA owner turns age 70-½.
Thus, if a taxpayer turns age 70-½ in 2016, he can delay the first required distribution to 2017. But, if he does so, there will have to be a double distribution in 2017 (the amount required for 2016 plus the amount required for 2017). Delaying 2016 distributions to 2017 will then bunch income into 2017. That would be beneficial if the taxpayer winds up in a substantially lower bracket that year.
•Defer a traditional IRA-to-Roth IRA conversion until 2017. Such a conversion generally is subject to tax as if it was distributed from the traditional IRA or qualified plan and not recontributed to another IRA. Therefore, a taxpayer who plans to make such a conversion should defer doing so if he believes the conversion will face a lower tax next year.
•Defer property sales. The President-elect's plan to repeal the Affordable Care Act (Obamacare) also would repeal the 3.8% surtax on investment income. This surtax applies to the lesser of net investment income or the excess of modified adjusted gross income (MAGI) over the threshold amount ($250,000 for joint filers or surviving spouses, $125,000 for a married individual filing a separate return, and $200,000 for other taxpayers).
As a result, if the surtax is repealed for 2017, taxpayers within the reach of the surtax, and are contemplating the sale of property that would generate a large investment gain, would benefit by deferring the sale until next year (assuming of course that the sale price would stay more or less the same).
If the sale can't be postponed, it may be possible to structure the deal as an installment sale. By making a sale this year with part or all of the proceeds payable next year or later, a non-dealer seller to whom the installment method applies becomes taxable in any year on only that proportion of his profit which the payments he receives that year bear to the total sale price. If the 3.8% surtax is repealed for tax years beginning after 2016, the profit on the post-2016 installment payments would escape the surtax.
Please note that the Trump tax plan would keep current law's maximum tax rate of 20% of capital gains.
Next week we will look at proposed changes to itemized deductions.
Consult with your tax advisor to determine how any item applies to your situation. IRS Circular 230 disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advise contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.