Look Ahead: Potential Tax Reform and Planning Opportunities

One thing many of us can agree on is that our current income tax code is confusing.  The last significant federal tax reform was in 1986.  With President Donald Trump, we are very likely to see some version of his tax proposal—or a GOP proposal—pushed through Congress in 2017.   Most experts expect the first year affected by tax reform will be 2018.  The following is a look at some proposed changes, plus some viable 2017 tax planning considerations, based on what we know today.

Proposed tax reform

Changes to individual income tax rates: President-elect Trump’s plan proposes to consolidate from seven tax brackets (10%, 15%, 25%, 28%, 33%, 35%, 39.6%) to three tax brackets (12%, 25%, 33%).

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The proposed changes will be beneficial for most married couples (see top chart). Individuals with $112,000 -192,000 of taxable income have a proposed increase in taxes (see bottom chart). For those who are in the “green zone” – where tax rates will potentially be lower next year than this year – tax planning becomes very simple: try to defer any income possible, and push it out to the lower tax rate next year.  In addition to deferring income until next year (when rates may be lower), looming tax reform would also make it more valuable to accelerate deductions (“red zone”) into the current year.

Other proposed tax reforms include:
  • Elimination of head of household filing status
  • Changes to capital gains tax rates
  • Elimination of 3.8% net investment surtax
  • Elimination or caps on itemized deductions
  • Higher standard deduction: $15,000 single and $30,000 married filing jointly versus $6,300 single and $12,600 married filing jointly
  • Elimination of some personal exemptions for each dependent
  • Elimination of the alternative minimum tax
What can you do? 

The answer is: It depends on your unique situation.  Here a few ideas:

Lower tax rates next year?

Defer Income

Higher tax rates next year?

Accelerate Income

Roth conversions: Lower tax rates next year?

Consider delaying Roth conversions until next year. Partial conversions to fill the lower brackets this year (25% marginal and below) may still be a good planning consideration

Accelerate deductions:

If itemized deductions are eliminated or phased out consider accelerating them before year end

Make charitable contributions:
  • Gift highly appreciated stock
  • Contribute to a donor-advised fund
  • Complete a qualified charitable distribution

Contact your tax professional and your WealthCare advisor to determine the best strategy for you.