Tax Planning for 2017

Want to talk to a CPA about how to handle a big windfall in 2017?  Estimate what you’ll pay in taxes if you exercise those stock options? Do normal, intelligent tax planning?

Unhappily, 2017 is not a normal year.  Donald Trump and the Republican party campaigned on the promise to make major changes in the tax policy.

The victors in the election campaigned on the promise that they would cut the top tax rates.

They wanted to simplify the tax code, too. What “simply” means is not certain, but Mr. Trump’s proposal included the idea of limiting some long-cherished deductions.  Charitable deductions would be capped at $100,000 per person, for example.

Man stares into a crystal ball to see the futureUnfortunately for planning purposes, we do not know yet if cutting the tax rates and adoption of the other plans put forth by Mr. Trump will be done all in 2017. Moreover, the campaign promises of the Republicans in Congress differ from what Mr. Trump said he wanted to do.

Which changes will pass? When? What other ideas will be implemented?

Our crystal ball is cloudy!

Realistically, the answers to these questions will develop during 2017.

Unfortunately, actions that Congress takes in December will affect the financial actions you had to take in January.

What we — and all other tax professionals — can do now is:

  1. Advise you what the tax consequences of your actions would be if the 2016 laws remain in place.
  2. Advise you what the tax consequences of your actions will be as individual changes are made to the tax laws in 2017.
  3. Speculate along with you about what other tax law changes may be made and what the effects of those changes will be.

Speculating is not a comforting alternative to solid, professional planning.  But, it is all we all can do until the ultimate shape and scope of tax law changes is known for sure.

American Flag with What's Next

We suggest that if you can postpone making major financial decisions that might be impacted by new tax rules, do put off taking any action until Congress acts!  Unless you have need for the cash generated by the exercising of stock options, for example, consider delaying exercising the options for a while.

Most years we suggest that you contact us early in the year to talk about potential major financial decisions.

In 2017, we will still be happy to talk with you and give you general advice. As the year progresses, it’s likely that we will be able to give tax planning advice with increasing certainty.

Probably!

How Trump’s Election Changes Your Tax Planning

Donald Trump has promised to drastically lower taxes next year, and with Republicans controlling Congress, he’s likely able to get some or all of the tax changes he wants passed.

Most of the proposals call for individuals and businesses to pay less, maybe much less, in 2017 (or 2018, if Congress is slow to act) than they would under current law.  Independent analysis of many of the proposed changes show that well-off individuals will benefit significantly from the lower rates proposed. NPR reports that, according to Lily Batchelder, a law professor at New York University and a visiting fellow at the Tax Policy Center, people earning a million dollars will get an average tax cut of $317,000.

Tax deduction - word cloud conceptThe plan also lowers the business tax rate to 15% from 35%.  US-based manufacturers may elect full expensing of plant and equipment costs, although selecting this approach means they will give up their ability to deduct interest expense. (See Donald Trump’s campaign website press release.)

President-elect Trump and Republicans in Congress also want fewer people to have to itemize deductions.  They plan on raising the standard deduction rate to $15,000/$30,000 for a single person/married couple (Trump’s plan).  At the same time, they would cap deductions at $100,000-single/$200,000-married (Trump’s plan).  In addition, some Republicans have suggested eliminating the deduction for state and local taxes, and the mortgage interest deduction may be scrutinized.  (Read the Wall Street Journal for more details.)

Of course, unless you have a fully-functional crystal ball, there is no certainty that all/any of the changes will occur. But, IF you believe that significant changes will be made to the tax code, then you should take action based on what you think is likely to change.

We don’t have any fortune-telling ability, but here’s what we think is reasonably likely.  If you agree, consider accepting our recommendations!

Assumptions: The 2017 tax rates will be lower than the 2016 rates for both business and businesses.   Some change to deductions will be implemented that will increase the standard deduction amount and limit itemized deductions.

man wearing a suit pointing the finger to the word taxes written in the foregroundRecommendations:

  • Postpone the recognition of as much income as possible until after December 31st.  If possible push off the closing dates of profitable sales, receipt of bonuses, and all other activities that create income.  You’re likely to be taxed at a higher rate this year than you will next year.
  • If you are a US-based manufacturer, postpone plant and equipment purchases and upgrades into 2017 when you’ll be able to expense them in a single year.
  • Give to charity and pay your property taxes in full in 2016.  Many of our clients will run into the $100k/$200k talked-about limit for itemized deductions.  If you’re close to that amount, give everything you can in 2016 where you’ll get full credit for your gifts and payments.  Even if your itemized deductions are much smaller, give and pay in 2016 when you’ll get credit for each dollar.  In 2017 you may not want to itemize and instead you’ll benefit from the new, higher standard deduction rates.

You have only until December 31st to take action to take action to lower your 2016 tax bill and to plan for 2017.  Do it!

Please contact us if you’d like help.  Maybe all you need is a check-in phone call.  Or, maybe your situation is complicated and you’ll want a full tax projection.  We are happy to find out what you need and work with you so that you pay the lowest amount of taxes legally possible.

And, of course, all of this speculation.  Who knows what President Trump and the new Congress will really do?!!

Why You Need Tax Planning This Year

If you are in a same-sex relationship you want to look at your tax situation.

Married gay coupleIf you’re legally married, you will have to use a “married” filing status for 2013 when you file your Federal return.  Find out how this will affect your tax bill and see if there are actions you can take before December 31st to save money.

Many same-sex couples are about to discover first-hand the “marriage penalty” written into the tax code. You may find that you’re no longer able to make a tax-deductible IRA contribution because your combined household income is over the limit.  Or, you may discover that your deductions for active rental losses are significantly less than what they were last year.  In past years, some couples were able to take losses of  $25,000 on each partners return for a grand total of $50,000 of losses.  This year under the best circumstances, they will only be able to take $25,000 and in some cases due to income limitations they may not be able to take any of these losses on the current year return and instead the losses will add to their passive loss carryovers.  These are only a few examples of how marriage impacts a tax return.

There are many phase out limits you may bump up against with in your combined return that one of you, or both of you, didn’t encounter before.

On the other hand, if your income levels are different — maybe one of you has no income at all — then you may benefit by paying a lower tax rate on more of your joint income than the single wage earner could in 2012.  Other married rates and limits can help a couple if they have unequal incomes.

For some couples filing as married will be a big deal.  Find out now.  Contact a CPA to see if you’d benefit from a tax projection.  Or, if you do your own taxes, recalculate your 2012 return as “married” for a rough idea of the changes you’ll see in 2013.

Finally, if you’re a same-sex couple considering marriage, do the same review. If you’re envisioning only a small, simple wedding to secure your legal rights, you may decide to get married sooner, in 2013, to receive a break on your taxes. Or, if you discover that you’ll be paying more in taxes after you’re married, you may decide to postpone the nuptials until at least January 1st so you can enjoy the filing single status one more time.

Like so many issues in the complex tax situation we have, there is no universal answer to whether you’ll pay more or less as a married couple.  But, a Fall examination of your taxes could make a big difference next Spring.

Why You Might Need to Do Tax Planning Now

The last deadline for 2011 income taxes just passed on October 15th, and the last thing that most of us want to do is to spend more time thinking about taxes.  Unfortunately, this year, we should.

Why 2012 is Special

Woman Doing Her TaxesMost years most people don’t need to do special tax planning or have a tax projection created for them.  If their circumstances haven’t changed too much from the past year, they can pretty much estimate what they will owe next April.

However, in 2013 there is one major change for high-income earners, one change for all wage earners, and another group of potential changes for all taxpayers that might make a 2012 trip to see your CPA cost effective.

  • For high earners: Healthcare reform is being financed in part by the extension of the Medicare tax on incomes over $200,000 (filing singly or $250,000 (filing jointly), and an excise tax on “Cadillac” insurance policies. (See Wikipedia for more details)
  • For wage earners: A temporary 2% reduction in the payroll taxes up to $110,000 in wages will expire January 1st.  This will result in an increased tax bill of $2,002 at the high end. Neither party seems inclined to extend this temporary reduction. (See CNN story)
  • Potential Changes for Everyone: 
    • The parties in Congress have not agreed on any extension of the “Bush Era tax cuts”.  Republicans refuse to vote for extensions that don’t include all people. Democrats insist that the cuts be eliminated for the well off, a term which is defined as people making more than $200,000 or up to $1 million, depending on the proposal.   If this impasse holds, then everyone’s tax rate will go up January 1st.  Without Congressional action, the lowest tax bracket will revert to 15% from 10% and the highest will be 39.6% instead of today’s 35%. (More details)
    • The parties in Congress failed to agree on deficit reduction measures.  As a result, the bipartisanly-passed Sword of Damocles will fall on the Federal budget, slashing spending.  These cuts, called sequestration, will stop $1.2 Trillion dollars in planned spending in unpredictable ways.  If a compromise is not reached and the automatic cuts avoided, businesses may suddenly find long-time orders and business relationships disrupted as across-the-board cuts hit Federal programs.  (See more)

Most years people try to put off realizing income past December 31st so that they can put off paying taxes for another 12 months.  But, this year is different.  If you are a high earner, you may want to take advantage of the 2012 rates that include the Bush Era reductions for all income levels.  If you earn less than $110,000, you may want to earn  as much as possible in 2012 when the 2% payroll tax cut is still in force.

In addition, you may want to put in place tax-minimizing retirement plans or take other actions so that you are ready on January 1st if rates do rise.

If Sterck Kulik O’Neill  can help with your tax strategy, please phone us at 415.433.4500. (More on CPA’s and income tax preparation.)

New Year’s Special: Pay and Save!

San Francisco Charles Sterck on Lowering TaxesIf you owe your CPA, pay your account balance this week and save on your taxes!

Well, it’s not just your accountant’s bill.  For many businesses and individuals it makes sense to pay as many bills as you can before the new year.

Most small businesses are on a cash basis. That means that you have to pay an invoice in order to count it as an expense against the business’ income.  And, most small businesses use the calendar year to record income and expenses.

Usually it makes sense to pay as many bills as you can this year so that the net income you report to the government is as low as possible.  A lower income results in lower taxes.

The same rule is also usually true for individuals.  If you can, you should pay property taxes, January’s home mortgage, and accelerate other tax-deductible payments into 2011.  The more deductions you accumulate in 2011, the less you will owe in April, 2012.

On the other hand, if you expect for you or your business to earn a lot more in 2012 than you did in 2011, you might want to push your tax-deductible expenses into 2012.  (You still should pay your CPA now, of course.)

The rules are somewhat complex, and you should contact a tax professional to see what the best course of action is for you. Everyone, though, should look at their tax situation THIS WEEK.

You need to act before New Year’s if you want most of the available deductions. Most people have until April 17, 2012 to fund their 2011 IRA retirement contribution, but all other options run out at midnight December 31st.

So, sit down.  Go over your business and personal bills. Make a pile of those invoices that have tax consequences, and decide whether you want to pay them now or next year.  Make your electronic bill payment, charge your credit card, or write the check and mail it.  Today!

For information on last-minute planning for your specific situation, please phone Sterck Kulik O’Neill at 415.433.4500.