If tax time is always a bit confusing, then Federal tax planning for 2017 might feel like a 12-sided Rubik’s Cube. While a precise algorithm may not exist to solve for this new tax environment, we are happy to offer some simple and practical advice for your consideration at year-end.
Congressional and Presidential plans for the tax code are gaining clarity and the incoming administration appears likely to reset some of the paradigms we currently understand about our tax code. Because any final plan will likely require support from both parties, SYM believes it is unlikely that tax liability will fall as far as some prognosticators suggest.
Even so, it’s improbable that tax rates will rise in 2017. To the contrary, we may well see the investment income surcharge disappear and income tax brackets drop (along with some adjustments to deductions.) So, how can a reasonable person plan for this uncertainty?
One longstanding opportunity is to pull tax deductions one might enjoy in future years into the current year. Usually this is a concept born out of the time value of money, where you can deduct with 2016 dollars instead of presumably less valuable 2017 dollars. However, this year also presents the opportunity for taxpayers to take the deductions in a year when your tax bracket may be higher than it will be in the future. This is particularly valuable for anyone who retired in 2016, especially if they received a severance benefit and other pay, but expect their income to fall in coming years.
Sometimes a winning tax strategy can be as simple as paying your upcoming property taxes in 2016. Those who are business owners might be able to take a larger loss in 2016 than they may expect in 2017. This option could benefit individual investors as well. While market movements over the past few years haven’t been particularly generous, market investors have also not experienced significant losses. Admittedly, this somewhat mitigates this approach. If a business owner or investor has large gains they need to take, they should almost certainly defer those gains into 2017.
Of course, everyone with the ability should maximize tax-deductible contributions to retirement plans in 2017. If you have already done so, you might consider making a large tax deductible charitable contribution to a donor advised fund from which you can recommend distributions to specific charities in future years. Donating stocks or mutual fund shares with embedded gains is even more advantageous.
Because we don’t know exactly what tomorrow’s tax rates will be, we also can’t know exactly how to act in 2016. However, SYM believes that because Federal tax policy is quite likely to shift lower in 2017, those who are most tax sensitive and whose circumstances allow for solid planning should consider taking appropriate action yet in 2016 to offset the long-term taxation of their income and wealth.