Year-End Tax Planning More Urgent as GOP Policy Changes Loom

Since tax policy is likely to change, here are some suggestions for financial advisors working with wealthy clients

Donald Trump speaking at an election-night rally. (Photo: AP) Donald Trump speaking at an election-night rally. (Photo: AP)

Every year around this time, if not before, financial advisors review client portfolios and make adjustments, if necessary, to limit tax liabilities. This year is no different but the changes that advisors make could be, due to the election of Donald Trump as president and the Republicans maintaining control of Congress.

Trump has a tax plan; so does has House Speaker Paul Ryan of Wisconsin. The two plans are not exactly alike but both would cut taxes, with the biggest cuts benefiting the wealthiest Americans.

Both plans reduce the current number of income tax brackets from seven to three, setting marginal tax rates at 12%, 25% and 33%, and both eliminate the 3.8% Medicare surtax on higher earners. Both plans also reduce deductions, but do so in different ways.

Trump’s plan would cap the value of itemized deductions at $100,000 for single taxpayers and $200,000 for couples; Ryan’s plan would eliminate all deductions except those for mortgage interest and charitable gifts.

Both plans also eliminate gift and estate taxes – now levied on estates worth more than $5.45 million for individuals and $10.9 million for couples – but Trump’s plan imposes capital gains taxes on the assets held at death above the current exemption.

Financial advisors should consider these proposals when engaging in tax planning with clients before year-end, with the caveat that “so much is unknowable,” says Lester Law, a wealth planner with Abbot Downing, the high net worth business unit of Wells Fargo.

Still, Law expects tax rates will decline during the Trump Administration for most people including the “ultra wealthy.” He suggests that advisors and their clients consider the following:

— Delay bringing any income forward into this year. “If you have the opportunity to sell a stock in December or January, wait until January.” At minimum the 3.8% surcharge on investment income goes away so the capital gains for the wealthiest Americans will decline. Trump would retain the 20% long-term capital gains tax; Ryan would lower it to effectively 16.5%.

— Accelerate deductions. Since both Trump and Ryan have plans to limit deductions, Law suggests that taxpayers make charitable contributions today rather than waiting until next year or beyond. “I don’t know if they’ll get a deduction in future years.” Deductions are also worth more when rates are higher and they’re likely to be higher this year than next.

— Take the freebies that exist today, like the $14,000 annual gift exclusion. “If you have a plan to do that, keeping on doing it…. [but] don’t pay any gift taxes now.” Up until now it’s been more advantageous for taxpayers to reduce their eventual estate by making gifts during their lifetime, but if the estate tax is eliminated or if the size of the exclusion from the tax is increased sharply, then taxpayers won’t need to worry now about reducing the size of their eventual estate while they’re alive.

— Hold off spending on capital equipment, if you have a business. Trump has suggested that he would allow businesses to write off capital expenditures up front instead of over time while also eliminating the deduction on debt interest.

“Taxes will be cut, but by how much and when and where are the questions,” says Law.

Given such uncertainties Law recommends that advisors and clients think things through and maintain a long-term view. “A lot clients are not sure. Let’s see how it plays out.”

Adding to the uncertainty are recent remarks by Trump’s pick for Treasury Secretary, Steven Mnuchin, a former Goldman Sachs executive and current hedge fund CEO and Hollywood film producer.

Mnuchin told CNBC last week that any reductions in taxes for upper income Americans will be offset by fewer tax deductions for those taxpayers “so that there will be no absolute tax cut for the upper class.” That contradicts Trump’s published tax plan, which the Tax Foundation says would increase incomes of the top 1% of taxpayers by 10-16%.

The Tax Policy Center said nearly half of the benefits of Trump’s tax plan would go to the top 1%, those households earning more than about $700,000 annually.

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