As 2016 rapidly winds down, I wanted to reach out with some thoughts on the upcoming tax season. Now is the time to review and plan your situation and we are available to assist in this process.
In the past several years, year end tax planning has been a fairly mundane exercise. Sure, there were some law changes but they tended to be rather specific and not applicable to most taxpayers. Three weeks ago I figured this year would prove to be the same as most recent years. However, my opinion changed on election night as the Republicans swept the Presidency and both houses of Congress. Now I believe, with proper planning, taxes can be minimized across a multi year time horizon. This will be particularly true for self employed taxpayers who, to some extent, can control the timing of their income and expenses.
President-elect Trump’s tax plan calls for sweeping reductions in marginal tax rates, a significant increase in the standard deduction, a radical change in the calculation of itemized deductions, an elimination of the Alternative Minimum Tax (AMT) and a rollback of President Obama’s Net Investment Income Tax. Of course, these are currently just proposals and will meet with resistance from groups both outside and inside his party. It is unlikely a final tax package will look exactly like the proposals. Nevertheless, it is probably safe to assume that taxes in aggregate will be reduced possibly as early as 2017. The Trump administration has made it clear that this will be one of their biggest policy initiatives once in office.
The most significant part of the proposal is a reduction of marginal rates. Currently there exist 7 rates ranging from 10% to a maximum rate of 39.6%. As proposed, there will be 3 rates: 12%, 25%, and 33%. Based on my readings of the analysis, almost all taxpayers would realize some tax reduction, though in varying degrees. I have seen projections that the average married taxpayer with $200,000 in earnings would save about $5,500, while a single taxpayer earning $120,000 would save about $2,400 in federal taxes.
While it is impossible to know what the final tax package will look like or whom it will impact, we can still plan for the likely cuts and make decisions accordingly. This provides an opportunity to defer income into 2017 (if possible) or expedite certain expenses into 2016. Obviously there is not a lot of time as once the calendar reaches 2017 most planning options will no longer be at our disposal.
Please do not hesitate to contact our office to discuss this unique opportunity and how it may affect your tax situation.