US rich Scramble to reaP benefitS of ProPoSed tax cUtS
new york — For wealthy Americans, the outcome of the 2016 election could be lucrative.
Democratic candidate Hillary Clinton proposed hiking their taxes. Donald Trump, her Republican rival and now the president-elect, proposed the opposite: $6.2 trillion in tax cuts over the next decade, according to the Tax Policy Centre’s analysis, with the top one per cent by income getting almost half the benefit. That translates into a 13.5 per cent boost to their after-tax income, compared to a 1.8 per cent increase for taxpayers in the middle fifth of incomes.
No one knows if Trump can get such big tax cuts for the rich through Congress, even one controlled by the GOP. They could open the gap between the wealthy and everyone else still further, while ultimately widening the US budget deficit and taking resources from other priorities such as health care and retirement.
But financial advisers to the wealthy are starting to bet that tax rates will fall as early as next year. And they’re telling clients to make their move before the end of 2016 to maximise the payoff.
Rich Americans generally have the most flexibility in taking advantage of these tactics. “You’re really only talking to a small percentage of people who can really react to things like this,” said Tim Steffen, director of financial planning at Baird. But middle-income taxpayers, including retirees, should also consider taking steps now that might save them extra money in the event of a tax cut.
The standard advice from tax planners is to lower your tax bill in any given year by pushing as much income as possible into future years and taking as many deductions as possible for the current year. Sell a stock that’s done well in December, for example, and you’ll owe taxes on those gains in four months, by the Internal Revenue Service deadline in mid-April. Wait until January, and taxes aren’t due for more than a year.
It’s the opposite for investments that have done poorly. Taxpayers can “harvest” losing stocks at the end of the year by selling them and then using those losses in April to lower their bill.
The strategy is all the more powerful if tax rates drop. Why finalise the sale of a business in 2016 when there’s a chance you’ll be able to keep more of the proceeds for yourself down the line?
That’s especially true if any tax bill passed next year applies to 2017 rather than taking effect in 2018. There are precedents for this: A tax cut in 2001 and a tax increase in 1993 both took effect in the same year they were passed.
So consider these seven smart tax moves for rich and middle-income alike.
Paychecks
Salaried employees generally can’t tell their employers to wait until January to cut December’s paychecks. But small business owners, along with those who earn commissions, may have more flexibility. A consultant owed for work in 2016 might wait until January to bill her clients.
Retirement tax breaks
Salaried employees can make sure they’re maximising their contributions to their 401(k)s and other pre-tax retirement accounts in 2016. Even if this means they have less to save next year, the trade-off may be worth it.
Retirement itself
If you’re living off a 401(k) or IRA, it might make sense to stop taking money from those accounts through the end of the year, said Peter Schumacher, vice-president at Cleary Gull Advisors. By lowering your distributions from pre-tax retirement accounts in 2016, you’ll lower your tax bill this year and potentially end up paying a lower rate when you replenish your cash supply next year.
Medical expenses
Taxpayers can deduct medical expenses if they amount to more than 10 per cent of their income, or 7.5 per cent for taxpayers 65 and older. If you’re scheduling an expensive procedure and you’re close to your threshold, you might try to get it done before the end of the year, when the medical deduction might be more valuable than in 2017.
Property
You can get a deduction on your federal taxes for any local taxes you pay. If you have any flexibility in when you pay property taxes or state income taxes, consider shifting those deductions into 2016.
Charitable contributions
Only people who itemise their taxes can deduct charitable contributions, and less than a third of taxpayers fall into this category. The wealthy are more likely to itemise, and to have the wherewithal to carefully time charitable contributions to maximise tax benefits.
Some middle-income taxpayers can use the same strategies. For instance, if you give a certain amount to a charitable organisation every year, consider doubling it this year and taking the next year off, said Schumacher. These taxdeductible contributions may be far less valuable next year, and not just because tax rates might fall.
Don’t go overboard
Taking too many deductions in 2016 could trigger the alternative minimum tax, san extremely complicated system designed to limit deductions for well-off taxpayers.
Meanwhile, holding on to a winning stock until 2017 may mean you pay a lower capital gains tax rate, but you also risk seeing those gains evaporate if the market crashes between now and then.
“Let it be an investment decision first,” Baird’s Steffen said. “You’d rather sell a day too early rather than a day too late.” — Bloomberg