Dear Mr. Market:
You’ve posted some very impressive performance since Donald Trump’s victory in the recent presidential election. While the debate will continue in regards to what changes will take place with the new regime in Washington D.C., individuals are contemplating how they will be impacted. What can you expect and how might you be able to make some strategic moves to take advantage of these changes? Let’s specifically look at what Trump and his team are proposing to change with the current tax laws and how it will impact your finances both today and in the foreseeable future.
With Trump in the White House and Republicans taking control over both the House and Senate, tax cuts are virtually a sure thing. Our current tax codes have individuals paying rates on a graduated level with seven brackets ranging from 10% to 39.6%. What many don’t realize is that with ‘Obamacare’ the top tax bracket pays an additional 3.8% on net investment income which brings their rate to 43.4%. Here are some key points to keep in mind as we move into 2017 and the potential changes:
- Individual Tax Brackets: Look for a reduction to three tax brackets: 12%, 25% and 33% along with elimination of the additional ‘Obamacare Tax’. Currently qualified dividends and long-term capital gains are taxed at 15% or 20% depending on income along with the additional 3.8% previously mentioned. Expect to see the top rate remain at 20% and the additional tax for healthcare removed.
- Estate Tax: Trump certainly did not hold back his feelings regarding the ‘death tax’ during his campaign! Currently individuals can pass up to $5,450,000 to their heirs tax-free and for a married couple it’s twice this amount. After that threshold an estate tax of 40% is imposed. Trump would like to completely eliminate the current estate tax structure and make radical changes to it.
- Overseas Profits: Trump made no effort to hide the fact that he wants jobs and funds that have moved overseas to come back to U.S. soil. Currently billions of dollars from U.S. based companies with foreign divisions are not captured with current tax laws. Trump has proposed a 10% repatriation tax on profits derived from these companies and suggested that this charge could be paid over a 10-year period. He has stated numerous times that he expects this to drive a huge inflow of business and profits back to the U.S.
- Business Taxes: Expect to see legislation that will cut the current rate of 35% all the way down to 15%. For those that operate as a partnership, Limited Liability Corporation (LLC) or S corporation, they could possibly see the same rate as corporations. Of all the proposals that Trump has mentioned this one could have the most profound impact with the potential of a tax rate cut from 43.4% (39.6% plus ‘Obamacare’ 3.8%) all the way down to 15%; particularly if these savings find their way back into the U.S. economy.
All of these rumored changes will not take place until 2017 so what can individuals do to prepare for their 2016 taxes? Below is a quick checklist of some year-end tax tips that everyone should be aware of:
- Consider working with a professional: There are numerous software and service solutions available these days but with all the changes in tax codes it is prudent to consider working with a tax professional. You might pay more for this but the peace of mind it offers is worth every single penny.
- Required Distributions: If you are required to take an RMD (Required Minimum Distribution) you have until the end of the year to complete it. The penalty for failing to do so is 50% of the amount not distributed. Also be aware that non-spousal inherited IRAs have unique distribution requirements.
- Maximize Retirement Savings: If you have not contributed the maximum amount to your traditional IRA or pretax contributions to an employer-sponsored plan, consider doing so to reduce your 2016 taxable income.
- Tax Harvesting: Take a moment to look at the moves made within your taxable accounts this year. If you have considerable gains consider selling positions that have losses to offset the tax liability. Also be aware of any tax loss carry forwards that you might have from previous years to manage your current taxable gains.
- Defer Income to 2017: With the potential changes we discussed earlier many individuals might find themselves at a lower tax bracket next year. Consider pushing items like: a year-end bonus, payments for services, business and rental income into next year if possible.
- Increase Tax Withholdings: If you are going to owe federal income tax for this year consider bumping up your withholding for the remainder of the year. This can be done with a Form W-4 through your employer.
- Plan Ahead: Waiting until the last-minute is not a plan! Take the time to put together your tax information, know your current situation and how it might change in the future. If this is an overwhelming process for you…we would encourage you to go back to our first point and consider working with a professional!
The winds of change are blowing in Washington D.C. and the impact that they could have on your personal finances could be “HUGE” or should we say “YUGE”… (pun intended)! Be aware of your current situation and how the newly proposed legislation will affect you going forward. If you find that you need help, consider asking for a referral from other professionals you currently work with. We also are here to help and encourage you to contact us at (888) 47-GUIDE or (888) 474-8433.