Preparing my year-end column on financial planning has been complicated this time around because of major tax changes that are expected to occur next year under the Trump administration.
While there is no single plan to analyze yet, the plans of both President-elect Donald Trump and Speaker of the House Paul Ryan would cut ordinary income tax brackets, increase standard deduction amounts and repeal and/or limit personal exemptions and itemized deductions.
The coming changes mean that you may need to rethink what you have done in the past to prepare for the year’s end and adjust your actions to reflect what is likely to be a new tax environment. The looming changes also mean that I need to write two columns for year-end planning. Here is Part One. Part Two will follow next week.
ACCELERATE ITEMIZED DEDUCTIONS The main theme for 2016 year-end planning for the nearly one-third of taxpayers who itemize their deductions is clear: You should determine whether it makes sense to pre-fund deductions such as state and local taxes, mortgage interest and charitable donations this year, because they are likely to be less valuable or potentially go away next year.
BUNCH ITEMIZED DEDUCTIONS Many expenses can be deducted only if they exceed a certain percentage of your adjusted gross income (AGI). So try to bunch legal advice, tax planning, travel and vehicle costs into one year, so you exceed the 2 percent floor.
GIVE BIGGER CHARITABLE DONATIONS You may want to give next year’s or future years’ charitable gifts in 2016, in order to take advantage of the changes on the horizon.
USE HIGHLY APPRECIATED SECURITIES FOR CHARITABLE CONTRIBUTIONS If you itemize deductions, you’ll write off the current market value (not just what you paid for them) and escape taxes on the accumulated gains.
PAY AND DEDUCT STATE AND LOCAL TAXES NOW If you live in a high-tax state or municipality and itemize deductions, you can deduct property taxes paid. While many high-income earners lose a chunk of this write-off due to the alternative minimum tax, many others may benefit from paying whatever is due for 2016 before year-end.
DON’T PREPAY MORTGAGES Before you start making your 2017 mortgage payments now, you should know that the IRS does not allow you to take deductions for prepaid mortgage interest expenses. That said, if you are a high earner and are thinking about a refinance or a new home loan, just know that the value of the mortgage interest deduction is likely to shrink in the future.
WAIT TO SELL WINNERS IN TAXABLE ACCOUNTS The usual advice is sell winners, but considering that capital-gains tax rates are likely to drop in the future, especially for high earners, you may want to hold off. However, if you expect your income to be much higher next year, you may want to realize capital gains today at the lower rate. Capital gains are added to your other taxable income when determining your tax bracket, so factor that in when you make your decision.
SELL LOSERS IN TAXABLE ACCOUNTS If you have investment losses in a taxable account, you can sell them to offset gains that you have taken previously in the year. If you have more losses than gains, you can deduct up to $3,000 against ordinary income; and if you have more than $3,000, you can carry over that amount to future years. If you’re going to sell something and replace it within 30 days, the new asset can’t be “substantially identical,” which is known as the wash sale rule. Avoid it by waiting 31 days and repurchase what you sold, or replace it with something that’s close but not the same as the one you sold.
Jill Schlesinger, a certified financial planner, is a CBS News business analyst. She welcomes emailed comments and questions.