The chances for tax reform next year are high, thanks to the November election of Donald Trump and the Republican sweep of Congress. For some, significant tax savings could be recognized provided they make some some key year-end tax planning moves.
Here are a few strategies you may want to consider to keep your personal and business tax bills down:
- Accelerate income tax deductions into 2016.
Trump has advocated for reducing income tax rates to 12%, 25% and 33%. Whether Congress will agree on those exact numbers is yet to be seen, but lower income tax rates are likely under Republican leadership. So be strategic in your approach: Deductions are more impactful when tax rates are higher (now), and gains will be less costly when tax rates are lower (next year and maybe beyond). Pay any fourth-quarter estimated taxes in December, make your January mortgage payment in December, and deliver your 2017 charitable donations in 2016 (more below).
- Make gifts with appreciated assets.
Donate as much as you can to charities and family foundations before year-end, and do it with stock that has gone up in value. That will ensure you get the maximum deduction for 2016.
(Owners of pass-through entities -- like S corporations -- can deduct their share of the business’ contributions on their personal returns. C corporations’ deductions are limited to 10% of taxable income.)
- Harvest tax losses in December to offset the year’s capital gains.
You may see some capital gains distributions from mutual funds near the end of the year. You can offset those gains in 2016 by selling losing investments, since the gains will likely deal a bigger tax blow in 2016 than 2017.
- Distribute income from trust and estate accounts in 2016 to lower income tax liability.
Estates and trusts are taxed at the highest income tax rate so it may make sense to distribute income to beneficiaries who are taxed at a lower rate.
- Delay income to 2017.
If you report on a cash basis (e.g., you’re a service business), you have some flexibility when it comes to reporting income and expenses. For example, you can delay invoicing for work you do in December so you don’t receive funds until early January (and pay tax on that income next year). Similarly, you can buy now the supplies needed for next year to maximize your deductions for this year. Of course, this is all sensible provided you don’t have an immediate cash flow issue.
- Hold off on buying any more capital assets until 2017.
Under Trump’s proposal, you’ll be able to write off the entire purchase in the year you buy it, rather than claim depreciation over a number of years (expensing).
- Set Up a Qualified Retirement Plan
If you don’t yet have a plan in place, you can sign the paperwork for a profit-sharing plan or other qualified retirement plan by the end of the year. Then you will have until the extended due date of your tax return for 2016 to actually make deductible contributions. Note: For SIMPLE IRAs, the deadline for a 2016 plan has passed; for SEP IRAs, you have until the extended due date of the return to both set up and fund the plan.
- Address S Corporation Concerns
If you own an S corporation and it has not been a good year, you’ll only be able to deduct losses passed through to you to the extent of your basis in stock and loans you’ve made to the business. Consider increasing basis (e.g., making a capital contribution or loan) so you’ll be able to fully write off the losses.
Above all, don’t hesitate to reach out to us. Your BGW tax advisor can review your specific situation and help you decide what moves to make before year-end. There are less than two weeks left in 2016. Don’t delay!