As President-elect Donald Trump continues to fill cabinet positions, more and more information is emerging regarding policies and plans. Among the most eagerly anticipated are the details on the plans the Trump administration has for tax reform. While nothing is set in stone, and many changes may not go into effect until 2018 or later, there are some steps taxpayers may wish to take in advance of potential shifts in tax policy.
- Tax rates. Trump’s team has indicated a desire to simplify and streamline the tax bracket structure, while also lowering the top marginal tax rate from 39.6% to 33%. This makes the strategy of deferring income from one year into the next more important than ever, as deferred income may be taxed at the lower rate. This all depends, of course, on the final timing and structure of Trump’s tax plan.
- Potential loss of deductions. The lower tax rates and simplified brackets may also mean streamlining deductions. The proposed House GOP tax plan, for example, calls for the elimination of deductions for medical expenses, real estate taxes, employee business expenses, state and local income taxes, and more. At this time, there is no telling what the net effect will be, but it might be wise to accelerate deductions into the current tax year or risk losing them altogether.
- 3.8% Medicare surtax. Trump has stated his intention to repeal “Obamacare” (the Affordable Care Act), but what will replace it is unclear. One part of the ACA that may disappear is the 3.8% Medicare surtax on high income taxpayers. For this reason, taxpayers may wish to put off dividends, bonuses, property sales and other significant income events in the hope of avoiding the 3.8% surtax should the ACA be repealed.
- IRA issues. If you are 70-1/2 this year and face a required minimum distribution from your IRA, you can defer it until April 1, 2017. This also defers tax on the distribution until the next tax year, when tax rates may be lower. Note that a delay now means that you’ll be taxed on two years of distributions next year. That may be OK if the rate is favorably reduced, or it could push you into a higher tax bracket. Check with your tax advisor before making that decision.
- Roth IRA conversions. Roth IRAs work well if the tax rate you’ll pay in retirement is high. But the Roth’s tax-free payouts will lose some of its luster if tax rates are reduced. You may wish to delay a decision on converting from a traditional to a Roth IRA until we see where the final tax rates fall under Trump. If you’ve already made the conversion, you have until October 16, 2017 to undo it.
At this point in time, all of this is pure conjecture. The players and the playbook for the Trump administration continue to evolve rapidly, which is why a “wait and see” attitude may be the prudent course to take. President-elect Trump’s stated desire to simplify the tax code will, ironically, complicate tax planning in the short term. You would be well advised to seek the counsel and guidance of an experienced tax advisor to help you navigate the uncharted waters ahead.
For more information on this and other tax issues, please contact the Gray, Gray & Gray Tax Department at (781) 407-0300.