Donald Trump’s stunning election upset will most likely mean lower taxes for the top 1% of earners in this country and much smaller tax cuts for the lower and middle classes. It remains to be seen whether Trump will be able to get his plan to overhaul the tax code through Congress, even though it is controlled by the GOP. Some fear that his tax plan will only increase the growing gap between the super rich and the rest of the population. It may also increase the budget deficit and drain money from health care and retirement.
Many financial advisors with ultra-wealthy clients are anticipating that tax rates will drop in 2017, and they are counseling their clients to begin making moves this year that will allow them to maximize their tax savings.
Tax Planning Tips
The standard tax-saving strategy that most advisors recommend to their clients in any tax bracket is to do everything possible during the year to minimize taxes and defer taxable income to the next year. “This is an exercise we normally go through. It takes on greater urgency this year,” Michael Kassab, chief investment officer at Calamos Wealth Management, told InvestmentNews.
Indeed, that strategy could be doubly effective this year, especially for wealthy taxpayers who might realize substantial taxable income in 2016 that could be put off until January or later. Those who are selling a business, for example, may profit substantially by waiting until next year when the brackets are lower for both individuals and corporations. Here are several strategies that taxpayers can use to make the most of the coming tax cuts.
- Deferred earnings: Employees can ask their employers if they can defer miscellaneous pay, such as a Christmas bonus until next year. Small business owners and consultants may be able to delay payments for goods or services rendered until the following year.
- Traditional retirement plan contributions: Now is the time to maximize your 401(k) or IRA contributions for this year, as the deductions that you receive will be more valuable than in future years when your tax bill is lower. And you have until the tax filing deadline of next year to max out your IRA contribution.
- Cancel traditional retirement plan distributions: If you are able to afford this, then consider cancelling the rest of your taxable retirement plan distributions for this year. You may also be able to save money on Social Security tax by doing this.
- Incur medical expenses: If your out of pocket medical expenses for 2016 are near the 10% adjusted gross income (AGI) threshold, consider having more medical or dental work done before the end of the year so that you can deduct the excess expenses on your return this year. Again, this deduction will be more valuable this year than it will in future years when the tax brackets have changed.
- Itemized deductions: Medical expenses aren’t the only thing that you can try to lump together to get a larger deduction. You may also be able to prepay property taxes, real estate taxes or home mortgage interest in order to get a larger deduction this year.
- Charitable contributions: This may be the easiest way to reduce your tax bill in 2016 if you itemize taxes, as you have the freedom to make these donations at any time and can also decide the amount that you wish to give. If you were planning on making a charitable donation in January, consider making it now so that you can get a deduction against the higher rate of tax that you are paying now.
- Tax-loss harvesting: This simple strategy allows you to declare a capital loss on any holdings that you have in a taxable retail account. You can net any capital losses that you realize against any capital gains that you have realized, and can then net up to $3,000 of excess losses against your ordinary income. Just be sure to obey the IRS wash sale rule so that your loss is not disallowed.
Wealthy taxpayers also have other options available to them that can help them to save on taxes that may not be available for middle-class filers. The purchase of equipment for a business or accelerating pay or bonuses to employees can provide substantial tax savings in some cases. Waiting until next year to bill clients or receive other compensation can also be a good idea. Finally, those who want to sell appreciated holdings can wait until next year to do so, when the tax bill may be lower.
The Bottom Line
These are just some of the strategies that you can use to lower your tax bill for 2016. Tax rates in 2017 may drop, so this year is the time to incur deductible expenses that can save you more money than they might in 2017.