Trump and Year-End Tax Planning
With Donald Trump as our president-elect and republicans set to control both the House and the Senate for the first time since 1928, major changes in tax law are expected.
The goal is to simplify tax rules and make it more difficult for high-income filers to overuse questionable deductions.
How will Mr. Trump’s campaign promises affect you? Although exactly when the changes will take effect is unclear, here’s what the tea leaves say could happen early enough to affect your 2017 personal tax return.
Lower income tax rates: President-elect Trump proposes to simplify federal tax rates and brackets from the current seven down to three: 12 percent, 25 percent and 33 percent. Under existing law, income is taxed at graduating rates that range from 10 percent to 43.4 percent. Mr. Trump proposes to cap the top capital gain and dividend rates at 20 percent and eliminate the 3.8 percent net investment income tax put in place under Obamacare.
Disappearing deductions: The proposed plan would more than double the standard deduction from $6,300 to $15,000 for single filers and $12,600 to $30,000 for couples. This means that a married couple would get to deduct $30,000 whether their itemized deductions totaled $1 or $29,999. Itemized deductions in excess of $30,000 will be deductible as usual. I expect that this higher standard deduction will benefit most Tennesseans because our state taxes are so low.
Mr. Trump is also proposing that married filers cannot exceed $200,000 in itemized deductions per year. This could hurt folks that live in high tax states like New York and California, along with people who make large charitable contributions.
How might these changes affect your year-end tax planning?
While there’s mystery to spare, we do know what 2016 tax rates are, and it seems certain that they will be lower in the future. Thus, it will probably pay off to think about how the Trump administration’s tax plan could affect your year-end tax planning.
I have found that most people who make significant charitable gifts say that they aren’t motivated by the tax benefits. I expect that many top earners will make some of their 2017 charitable deductions in 2016. Doing so will ensure the greatest opportunity to deduct your donation and dollar for dollar, you will reap the greatest tax savings. This is because you can currently deduct charitable gifts at the rate of 43.4 percent, while the 2017 proposed lower rate is 33 percent. For example, a $10,000 charitable gift in 2016 will save you $4,340 tax while the same gift in 2017 will only reduce your taxes by $3,300.
Don’t bite off more mortgage than you can chew. A lot of people lean on the mortgage interest deduction to determine how much house they can “afford” or to justify using a home equity line of credit for major purchases.
Be sure that you can comfortably handle your debt service even if you don’t qualify to deduct any of the interest. That’s a good financial practice regardless of the tax environment.
This column was featured in the December 4 Knoxville News-Sentinel. You can read it here: Trump and Year-End Tax Planning
Meet the Author
Tom Coulter, CPA
Tom is the President and a founder of Meridian Trust. Tom graduated from The University of Tennessee, Knoxville, in accounting with honors, in 1978. Tom previously worked for the international accounting firm, Deloitte. He later joined the financial medical advising firm, FIS Associates, before founding Meridian Trust in 1997. Tom has worked extensively in retirement planning, taxation, estate and financial planning and investment management. He is a Certified Public Accountant, a member of the American Institute of CPAs (AICPA), and the Tennessee Society of CPAs (TSCPA).
Tom is also credentialed as a Personal Financial Specialist (PFS) by the AICPA.