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.
