Year-End Tax Moves for High-Net-Worth Investors to Consider Following Trump’s Victory
Donald J. Trump’s election as president could lead to shifts in a range of economic and financial policies. Perhaps none are more significant to upper-income investors than those relating to taxes. Among other proposals, Trump has called for broad cuts to income taxes, the elimination of federal estate and gift taxes, a cap on deductions and repeal of the alternative minimum tax.
Of course, it’s early in the process and much is still unknown. But even before the election, there was a growing consensus in Washington about the need for tax reform. Adjusting the tax code is not easy and any changes must go through the legislative process. The Republican sweep of both the White House and Congress increases the possibility that key features of Trump’s platform will be enacted in some form next year. We are still several weeks from the inauguration, so the outcomes of many of these changes are far from certain.
In light of some of the proposals, we recommend that clients ask their tax advisors the following two questions:
1. Should I defer investment gains while realizing any current losses?
If passed, Trump’s income tax proposal could be particularly beneficial to upper-income wage earners. He wants to lower the top tax rate to 33% (from the current 39.6%) and condense the number of income brackets from seven to three. Capital gains rates would remain the same. But the president-elect has called for elimination of the 3.8% net investment income tax (NIIT), which was implemented as part of the Affordable Care Act, and retention of favorable tax treatment on capital gains and qualified dividends.
The possibility of lower marginal rates and repeal of the NIIT means taxpayers could benefit from deferring realization of gains until 2017. Although one should never base investment decisions solely on potential tax consequences, recognizing any available losses this year to the extent they can offset portfolio gains may be advisable in some circumstances, given that such write-offs are more valuable in a higher-rate environment.
2. Should I maximize itemized deductions and accelerate charitable contributions?
Beyond tax rates, the president-elect seeks to cap itemized deductions at $100,000 for single filers and $200,000 for those filing jointly. Trump would like to eliminate personal exemptions but increase the standard deduction to $15,000 for singles and $30,000 for joint filers. As a result, upper-income earners might consider maximizing itemized deductions this year while accelerating charitable contributions to make the most of current write-off allowances. There are several mechanisms by which one can make charitable gifts, including direct donations to public charities and contributions to a donor-advised fund. Accelerating deductions for state and local taxes, as well as for property taxes, could also be beneficial, but taxpayers should be aware of triggering the alternative minimum tax.
As with most tax planning, it’s best to discuss your unique circumstances with a tax professional to try to position yourself well in advance of potential revisions in the law. Because no one knows what will happen once the new government commences, understanding your options in the final weeks of this year could be beneficial down the road if meaningful changes are enacted.