Trump, Year-end Planning, and Married Status: It’s Complicated

During these final days of 2016, we hope you are enjoying holiday gatherings with family and friends.  In addition to holiday cheer, winter vacations, and travel, another year end tradition turns our attention to the much less festive activity of year end planning.  

With the presidential election in the rear-view mirror, tax reform will be front and center in 2017.  President-elect Trump and the GOP plan foreshadow lower rates and eliminate all but home mortgage interest and charitable deductions from allowable itemized deductions. Of course, we know there is a wide gap between proposed changes and a finalized tax bill, and making any changes against this backdrop should be measured with this uncertainty. 

In most environments, we cannot handicap the likelihood of any proposed change coming to fruition, and this year is far from an exception. There are many moving parts and the political approaches to tax reform have likely expanded with increased party factions.
Typical year-end tax planning involves reviewing the benefits of moving income (or deductions) between this year and next, to the extent that’s possible.  Because of the complexity of several areas of income taxation that might be impacted, this is certainly not a DIY project. Changes affecting the individual income tax return include the calculation of allowable itemized deductions, repeal of the 3.8% Medicare surtax on investment income, potential elimination of the alternative minimum tax (AMT), which reduces the benefit of certain tax preferences, as well as proposed changes to tax rates.
One of the major proposals, under the Trump plan, is reducing the number of tax brackets. Historically, this is not the first administration to propose such changes, which is often labeled “tax simplification.” (One could also argue that the complexity in tax compliance is not so much rooted in the number of tax brackets, as it is in the number of pages in the IRS Code!) Whatever its label, the plan is quite clear in its advantages for one group of taxpayers — those with taxable income above $425,000 — who could enjoy proposed lower rates by pushing income into 2017. 
Under the proposed tax brackets, married individuals would see a 3% income tax rate reduction across several levels of income: taxable income of $150,000 to $200,000, and taxable income above $425,000. Married taxpayers who could hit those “marks” would be well-advised to defer income to 2017, as the rates might be lower. Further, the 3.8% Medicare tax on investment income might also disappear, with the cautionary issue being how the government will unwind this funding of the Affordable Care Act in one calendar year.
Single filers at the highest tax bracket — taxable income above $425,000 — would also benefit by deferring income. As proposed, however, single taxpayers with taxable income between $110,000 and $190,000 will see a tax rate increase.  (Time will tell whether the proposed disparity between treatment of Married and Single filing status will translate into a boon for the marriage industry!) 
Planning for income at the highest tax bracket levels is relatively easy to assess; it is mostly business as usual. At the highest brackets, the default strategy is often the same from year-to-year: Postpone when possible. Yet, we again encourage you to consult with your accountant, as these decisions are complicated by the AMT, which this year could result in a lower tax rate than is proposed under the Trump Plan. 
Stay tuned, as this next year will certainly be interesting.  We wish all our friends and clients a Happy New Year, and safe travels.