Now is the time to accelerate deductions
December 13, 2016
By Josh Miller, CPA
President-elect Donald Trump’s proposed tax reform will place the majority of Americans in a lower marginal tax rate next year causing some considerable changes to the value of tax deductions. The proposed reform would result in the following income tax rate changes:
- Current rates of 10% and 15% = 12%
- Current rates of 25% and 28% = 25%
- Current rates of 33%, 35% and 39.6% = 33% and repeal of .9% Medicare tax and 3.8% Net Income Investment Tax (NIIT) for those in the top bracket
As Trump’s tax plan (which mirrors that of the House GOP) takes the current seven income tax brackets down to three, higher-income earners especially will want to make an even more concerted effort to accelerate tax deductions and defer income for 2016 to maximize on the current rates.
As an example, if you make an additional charitable contribution of $100,000 by December 31, 2016, you could save $39,600 in taxes. With the expected rate reductions in 2017, that same contribution will only save you $33,000.
Methods for accelerating tax deductions vary based on your specific situation and what works for you as an individual and for your business. Some of the most popular options for deferring taxable income involve pre-paying deductible expenses for 2017 in the current tax year. Some examples include:
- Pre-paying property tax in 2016 that will be due in 2017 (individuals and businesses)
- Increasing your 2016 4th quarter estimated payment of state income tax and paying in December rather than waiting until the due date in early 2017
- Pre-pay insurance premiums for 2017
- Pre-pay 2017 maintenance or IT contracts
- Making large vehicle or equipment purchases, taking advantage of Section 179 (new or used) and/or Bonus Depreciation (new only)
- Accelerate charitable giving plans (individuals and businesses) – This is one of the easiest methods for individuals of all income levels
- Take any possible losses in capital investments (stocks, bonds, mutual funds) this year to offset gains especially if you are in the top bracket and subject to the 3.8% NIIT
While proposed tax laws are never guaranteed prior to enactment, it is almost certain that the marginal tax rates will change in 2017 with a Republican majority in Congress and Trump as president. As such, deductions will likely prove to be worth more in 2016. Understanding your situation and all the possible deductions available should be part of any business and individual tax strategy. Developing that strategy and taking action to maximize these deductions is critical in these final weeks of 2016.