With Donald Trump in the White house, big changes are coming for taxpayers. New tax policies are still a moving target, but there are some things you can do now, to reduce your 2016 taxes, and prepare for 2017.
Disclaimer: I am not a tax accountant. Any tax tips mentioned here are only suggestions and not to be taken as advice. Always consult with your tax adviser when it comes to your particular situation.
Now, on to the news…
The Trump presidency is expected to usher in a massive new tax plan that will have big implications for all Americans and U.S. businesses. Before we look at how we should close out 2016, we should know what’s ahead. That’s not something we can be sure about, but the following suggestions are predicated on how Forbes laid out the Trump tax proposal in several articles over the last few weeks.
Tax Tip No. 1: Consider Deferring
Your tax bracket may fall next year, so you may want to defer any 2016 income until 2017. Talk to your accountant.
Here’s how it works: Right now, we have seven tax brackets for individual taxpayers. They start at 10 percent and work their way up to 39.6 percent.
Under the Trump proposal, there would be just three tax brackets. The first would be 12 percent for individuals with income up to $37,500, and for couples with income up to $75,000. The second bracket rises to a 25 percent tax rate for singles earning up to $112,500, and for couples earning up to $225,000. Anything above that would be taxed at 33 percent.
This tax proposal is already controversial since it actually “raises” taxes on the poorest taxpayers, who are paying 10 percent right now. It’s also very different from a plan Trump proposed in 2015 that set the tax rate at 0 percent for people making up to $25,000 and couples making up to $50,000—and 10 percent for people making up to $50,000 and couples making up to $100,000. The remaining two tax brackets under the 2015 plan were 20 percent and 25 percent. There’s sure to be a push-back against Trump’s new plan, as opposed to the one he put forth last year.
As for capital gains, Trump wants to align those percentages to his three basic tax brackets. At the first-tier level, there would be no capital gains, at the second-tier level, capital gains would be pegged at 15 percent, and at the third-tier level, 20 percent. Right now, capital gains are typically taxed at 15 percent and rise to 20 percent for taxpayers in the 39.6 percent bracket.
And then there’s the additional 3.8 percent for Obama care that Trump is vowing to eliminate. That’s a savings on top of anything I just mentioned. Again, any change in the tax plan must go through Congress and even though Republicans control both houses, they only have a simple majority in the Senate.
Tax Tip No. 2: Declare Your Independence
Quit your job and become an independent contractor! Also, explore the benefits of forming an LLC for your business or real estate. You will save “bigly” on taxes under Trump.
This tax change proposal is huuuuge, especially for our Real Wealth Network members who may have already formed LLCs or are thinking of doing so. Under Trump’s plan, “all” business income would be taxed at 15 percent.
And the same holds true for LLCs, partnerships and S Corporations. They would all get taxed at Trump’s proposed corporate flat tax rate of 15 percent. Right now, the corporate tax rate is 35 percent—so big savings here. Again, you should talk to your accountant about your options.
Tax Tip No. 3: Sell in 2016
Forbes is suggesting that some people might save money on taxes by selling their investments in 2016, as opposed to 2017. This is a more complicated scenario, and it doesn’t apply to all taxpayers. It’s something that would need more detailed analysis by your accountant.
I’m an advocate of holding on to hard assets if they cash-flow. But if you were thinking of selling, this might be the year to do it. One of the reasons is that some 1031 companies are concerned that Trump will eliminate the 1031 exchange to offset the low corporate tax rate. If that’s the case, you might want to get that 1031 started now!
Tax Tip No. 4: Increase Donations While You Can
You might want to increase your donations this year, while you can. Trump wants to lower the limit on itemized deductions.
For singles, the president-elect wants a cap of $100,000 on those deductions. For couples, he’s calling for a $200,000 limit. Forbes writes that it’s still not clear whether charitable contributions will be subject to these limits, so this “tip” is up for debate.
Tax Tip No. 5: Get the Write-Off Right
Don’t buy assets just for the depreciation write-off before the end of the year. Trump wants to give you the option of a 100 percent write-off in the year those assets were purchased, as opposed to the current multi-year write-off rules.
That’s right. Donald Trump wants to give business owners a 100 percent write-off option, without limitation! Wow.
Right now, business owners can depreciate assets over a period of three to 39 years, depending on the asset. They can also take an immediate 50 percent “bonus depreciation,” but that doesn’t beat the 100 percent write-off you might get next year. So you might want to keep your wallet in your pocket until January—after you’ve consulted with your accountant, of course.
Tax Tip No. 6: Stayin’ Alive
Don’t die until next year.
The president-elect is promising to get rid of the “Death Tax.” Currently, you can pass onto your heirs an estate worth up to $5.45 million without paying taxes, more if you’re married. Anything above that value would trigger a 40 percent tax obligation.
The Trump plan would do away with the estate tax altogether. His plan does allow for tax on any appreciation, but that tax would only have to be paid if and when the beneficiary sells the asset. So the tax obligation would be deferred.
Either way, it might be a good time to sit with your aging parents or your children to discuss your trust. Remember, a will still goes to probate, so take the time to set up a trust.
There’s still about a month left in 2016 to sort through the new tax options. I hope this rundown helps get you on the right track for your individual taxes, and for those involving your rentals, and other business endeavors.
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About the Author
Kathy Fettke is the founder and co-CEO of Real Wealth Network, a passive real estate investing club with more than 24,000 members. She’s also the author of “Retire Rich with Rentals” and host of “The Real Wealth Show,” a featured podcast on iTunes with listeners in 27 different countries. Kathy is passionate about understanding real estate cycles so she and her members can invest in the best markets and best deals available today. She is frequently invited to share her expertise on CNN, CNBC, Fox News, NPR, CBS MarketWatch and in the Wall Street Journal. Kathy received her BA in Broadcast Communications from San Francisco State University and worked in the newsrooms of CNN, FOX, CTV and ABC-7. She’s past-president of American Women in Radio & Television. Kathy loves the freedom that real estate investing can bring. She lives in Malibu, California, with her husband and two daughters and enjoys traveling, hiking, rock climbing, skiing, figure skating and surfing.