President-elect Trump proposes leaving itemized deductions in place but capping the deductions you can claim at $100,000 for individuals and $200,000 for married couples. He wants to raise the standard deduction to $30,000, instead of the current $12,600 for couples and allow $15,000 for single payers.
Trump also would let families, including stay-at-home parents, fully deduct the cost of child care for children under 13.
What, if anything, can you do to position yourself for the possibility that these changes could take place? Tax advisers are discussing with their clients strategies that could help position them to save on tax bills in case the Trump proposal becomes law. Wind, while emphasizing the uncertainty of any changes, says, “My colleagues and I all agree it is prudent to look at the possibility that some of these proposals could pass.”
Wind outlined a few possible strategies, with the caveat that they are mostly useful for higher-earning taxpayers. Remember, though: these are only proposals. “Some of them may never become law,” Wind says. “It is very tricky to advise. I think you can (only) make people aware of the possibilities.”
- Defer income. If you are in one of the higher tax brackets and you could enjoy a lower tax rate if the Trump plan succeeds, try to postpone receiving some income until next year. Here’s why: For 2016, for single people with taxable income over $415,050 and married people with taxable income over $466,950, deferring income could save a lot of money because income over those amounts are taxed at the highest rate, which currently is 39.6 percent. Under the Trump proposal that highest tax rate would be 33 percent. Delaying income until after Jan.1 potentially could save a single person with $415,000 worth of income about $24,000 (and a married couple with $466,950 in income could potentially save $28,017). Tactics for deferring income could include delaying invoicing, deferring a year-end bonus to 2017 and delaying closing the sale of a business until the new year.
- Accelerate income. You could take the opposite approach if you think your rate might increase. For example, if you are in the 28-percent bracket and think you could be pushed into the 33-percent rate under a Trump plan, you’d try to take all the income possible in 2016, in order to pay taxes at your current rate. A married couple earning about $160,000 to $200,000 together might be among those caught in this bind, Wind says.
- Take deductions. If you itemize deductions, claim all you legally can for 2016 since deductions next year could be much less generous. A tax proposal by the House Republicans would go even further than Trump’s, allowing itemized deductions only for mortgage interest and charitable donations, points out tax expert Michael Kitces.
- Give to charity. Trump’s proposed limit on deductions would affect about 329,000 taxpayers who take some $119 billion in itemized deductions, shrinking their possible deductions to about $45 billion, estimates the conservative American Enterprise Institute. This would “likely have a substantial negative impact on charitable giving,” AEI says. The House Republicans want to leave the charitable deduction in place, but many wealthy donors are taking no chances and making larger-than-usual donations before the end of the year.
How do you think you’ll be affected by Trump’s policies? Share with us in comments below or on our Facebook page.