In our recent article, we summarized the major proposals that President-elect Trump and House of Republicans plan to implement as one of their top priorities when forming the new government in early 2017. Taxpayers who believe these tax proposals will be in place for 2017, should make some year-end tax plan(s) to take advantage of the proposed savings next year.
The following summarizes some of the opportunities our tax analysts recommend implementing before December 31.
U.S. Tax Plan for 2017
Defer income to 2017
The new plan reduces the top tax rate to 33% instead of current law’s 39.6%. It also proposes three tax brackets instead of seven. This results in reduced taxes for middle and upper income taxpayers.
One of our main strategies is to defer income, where possible, into the coming year. This year, it would make even more sense for middle and upper income taxpayers if the Trump tax plan goes into effect for tax year 2017.
Some of the ways to defer income until 2017 include:
- Defer bonuses until January. If a taxpayer is expecting a year-end bonus asking the employer to pay the bonus in January rather than December could result in significant tax savings.
- Cash-basis taxpayers are taxable when the customer pays. Such taxpayers could hold off billing their customers or clients until next year so that no payments are received in 2016.
- For taxpayer who turned age 70 ½ in 2016, delay receiving the first distribution of the required minimum distributions (RMDs) from an IRA or 401(k) plan. RMDs from IRAs are required each calendar year, however, “first time distributions” must begin by April 1 of the year following the year a taxpayer reaches age 70-½. Although, the taxpayer will be required to take a double distribution in 2017, it may be beneficial if the taxpayer winds up in a substantially lower bracket that year.
- Defer converting a traditional IRA to a Roth IRA until 2017. Normally, these conversions are subject to tax as if the taxpayer received a distribution from the traditional IRA or qualified plan, therefore a taxpayer who believes the conversion will face a lower tax next year should defer making a conversion until 2017.
Defer Property Sales
Currently there is a 3.8% surtax on investment income. This tax applies to the lesser of:
- net investment income, or
- the excess of modified adjusted gross income (MAGI) over the threshold amount ($250,000 for joint filers or surviving spouses, $125,000 for a married individual filing a separate return, and $200,000 for other taxpayers).
Trump’s plan is to repeal the 3.8% surtax on investment income. If a taxpayer will be subject to the surtax and is thinking of selling a property that would generate a large investment gain, he/she would benefit by deferring the sale until next year. Note that the Trump plan proposes to keep the lower rates on capital gains.
If the taxpayer cannot defer the sale it may be advantageous to structure the deal as an installment sale. In this case, the taxpayer only becomes taxable in the year in which he/she receives the payments. Deferring the payments to a future year where no surtax applies, results in a lower tax bill overall.
Accelerate Itemized Deductions
President-elect Trump’s tax plan proposes a dramatic increase to the standard deduction: $30,000 for joint filers (up from $12,600 for 2016) and $15,000 for singles (up from $6,300). As taxpayers have the option of either claiming itemized deductions or the standard deduction, many more individuals will be claiming the higher standard deduction rather than itemizing.
Taxpayers who will not be itemizing in 2017, would see a tax savings by accelerating some of their 2017 itemized deductions into 2016. This can be achieved in a number of ways, such as:
- Making early charitable contributions.
- Paying state income tax and local property tax early.
- Accelerating medical procedures or expenses, such as dental work or eyeglasses, etc. if the taxpayer’s 2016 medical expenses will exceed the 10% of AGI floor (7.5% of AGI for those age 65 or older).
Proper and timely tax planning is the key to saving on tax expenses. U.S. Individual and Business taxpayers should consult tax professionals to avoid missing out on tax saving opportunities.
AG TAX LLP CAN HELP
If you have any tax-related queries, need assistance with tax planning or filing your tax returns please contact us. Our team comprises of highly experienced tax professionals with extensive knowledge of US and Canadian tax laws as well as cross-border compliance.
Furthermore, as a full service accounting firm, AG Tax assures complete assistance with even your most complex tax needs.
We can assist with:
- Canadian Personal and corporate tax returns
- Cross Border Taxation and Business Planning
- US Personal and Corporate Taxation
- Disclosure of Foreign Assets and other information filings
- Retirement planning
- Estate Planning, Inheritance tax advice
To obtain a quote or to arrange for a consultation to discuss your tax related queries, please contact us at:
- 416-238-5920 (Greater Toronto Area, ON)
- 604-538-8735 (Greater Vancouver Area, BC)
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Disclaimer: The information in this publication is accurate as of the time of its publication. AG Tax assumes no responsibility for changes to tax legislation subsequent to the publication of this document. The information provided is for general information purposes only and should not be acted upon without seeking professional advice. If you would like to engage our services, please contact our staff and obtain authorization to send our firm confidential information. A client relationship is not created by the transmission of information. A client relationship is only formed with our firm when a scope and engagement letter signed by the firm and the potential client detailing the terms of engagement is present.