Whenever there is a change in Presidential administrations, the incoming chief executive has a list of priorities. One of Donald Trump’s apparent immediate concerns is tax rates.
Presently, there are seven individual tax brackets (10%, 15%, 25%, 28%, 33%, 35% and 39.6%). Reportedly, the Trump administration wants to reduce the brackets to 12%, 25%, and 33%. Additionally, the corporate rate of 35% is proposed to drop all the way to 15%. There is also talk of pass-through S-Corps, LLCs and partnerships being taxed at 15% on the owners’ individual returns.
Whether any or all of Mr. Trump’s desires become part of a new tax law is up for debate, but realistically speaking, it is unlikely that tax rates will increase in 2017. Therefore, with one week to go in 2016, there are a number of tactics that individuals and businesses alike can do to push more taxable income into 2017 than in 2016.
The two basic ways that taxable income can be moved is by incurring expenses in 2016 instead of 2017 and deferring income from 2016 into 2017. Here are some ways to do that, although speaking with a tax advisor is recommended to get the complete idea of whether any of these strategies make sense to your specific case:
Establish a Donor-Advised Fund
High-wealth individuals with charitable intent can create a donor-advised fund, which will benefit charities into the future. The tax benefit is immediate and could be more tax-beneficial than writing checks to these charities incrementally over the next few years.
Delay Required Minimum Distributions
If you turned 70½ in 2016, you have to take a required minimum distribution (RMD) from an IRA; however, that RMD can be delayed until April 1, 2017 as long as the next distribution is made by December 31, 2017. Depending on the level of distribution and other income, this may or may not be a wise way for retirees to move income from 2016 into the new year.
Cash-basis taxpayers should pay as many of their business expenses in 2016 as possible, even if it means prepaying for some items. Conversely, cash-basis taxpayers can wait until the very end of the year to invoice customers so that they do not collect the monies for those services until 2017. Constructive receipt rules apply, so you can’t simply store a check you received in your desk drawer until the calendar turns, and this strategy does not work for accrual-basis taxpayers.
Contemplate When to Buy Equipment
Usually, a way to defer taxes is to purchase needed equipment and place it in service before the end of the year. With attractive Sec. 179 and bonus depreciation rules, the acceleration of depreciation on capital purchases is a good way to reduce taxable income. However, one of Mr. Trump’s proposals is to increase the Sec. 179 limit, which may mean that businesses get a bigger bang for their buck by delaying equipment purchases into 2017. Once again, making this decision will be easier with the help of a tax advisor who is familiar with your particular situation.
By Dan Massey, CPA, Manager