Election makes year-end tax planning tricky

Year-end income-tax planning often is tricky enough. This year, the uncertainty rises due to the pending power transfer in Washington.

President-elect Donald Trump has vowed a significant revamp of the federal income-tax code for individuals. But the details — even with Republican control of Congress — still aren't known, especially since the House GOP leadership has its own ideas and Democrats will demand a voice.

"Democrats maintained the ability to filibuster legislation in the Senate, assuring their seat at the table when it comes to drafting new laws," noted Tim Steffen of Robert W. Baird & Co. in a commentary.

Any changes aren't likely to be made retroactive, meaning they won't directly affect your 2016 return to be filed early next year. But they could affect your planning strategies over the waning weeks of this year.

Where we stand now

Trump wants to cut tax rates and make other substantive changes. But Americans will enter the coming tax season with the status quo intact for 2016 returns. That means individual tax rates ranging from 10 percent to 39.6 percent remain in place for filing next April, noted the National Society of Accountants and tax researcher CCH in a recent commentary. The standard deduction will be $6,300 for singles and $12,600 for married couples filing jointly.


This December won't see the type of year-end legislative adjustments that became common in the past, when Congress made last-minute moves to extend provisions that expired or were set to expire. Legislation in late 2015 ended much of the uncertainty by permanently extending several breaks.

For example, the education-focused American Opportunity Tax Credit and a special classroom-expense deduction for teachers both were made permanent, as was the option to deduct state and local sales taxes. Another permanent move allows seniors to donate some Individual Retirement Account distributions to charity rather than first withdraw the money and count it as taxable income.



Normal strategies

Given that the income-tax rules for individuals likely won't change for 2016 returns, certain planning tips remain viable. For instance, taxpayers often find it wise to defer income (if they can) to the following year so as not to pay taxes in the current year. Similarly, those who itemize deductions often want to accelerate or take these expenses in the current year so they can use them more quickly. An example would be donating  money to a charity in December rather than in January.

Another strategy involves managing unrealized investment gains and losses in taxable accounts. You generally want to delay selling stocks, mutual funds or other profitable assets so that you don't have to pay current-year taxes on any profits. Conversely, it's often wise to sell money-losing investments before year-end to reap a current benefit — if your losses exceed your gains, you often can deduct up to $3,000 of the excess against ordinary income in a year.



Choosing a year

Bunching is another possibility. This involves delaying or accelerating certain expenses so that you have larger overall deductions either this year or next — assuming you don't have sufficient deductions to itemize both years yet have the flexibility to prepay or delay certain expenses.

Similarly, it pays to check your eligibility for certain tax breaks, which can be wise if your income is near the thresholds where benefits phase out. Examples cited by the National Society of Accountants and CCH include personal exemptions, education and adoption credits, the deduction for student loan interest, and allowable contributions to Roth or traditional IRAs.

Possible new wrinkles

Given the shift to Republican control next year, other strategies could become important. Trump wants to compress the current seven individual brackets to three, featuring tax rates of 12 percent, 25 percent and 33 percent. Trump also has vowed to eliminate personal exemptions and repeal both the Alternative Minimum Tax and the 3.8-percent tax on net investment income for high-income taxpayers.

A plan advanced by House Republicans would do much the same, except that certain numbers would differ. For example, long-term capital gains and qualified dividends would be taxed at rates of 0 percent, 15 percent and 20 percent under Trump, similar to now, compared to rates of 6, 12.5 and 16.5 percent under the House plan. Though rates on long-term capital gains might not change, different short-term rates present a year-end strategy. "Because short-term capital gains are taxed as ordinary income, postpone realizing these gains until 2017, when rates may be lower," wrote Paul Pagnato of Pagnato Karp, a wealth-advisory firm.


Things get more interesting with deductions. Trump would more than double the standard deduction to $15,000 (singles) and $30,000 (married filing jointly), with the standard deduction also going up under the House Republican plan. For people who continue to itemize, deductions would get capped at $100,000 (singles) or $200,000 (married filing jointly) under Trump, while House Republicans would eliminate such deductions entirely except for the mortgage-interest and charitable-donation tax breaks.

Only about one in three people itemize currently, and that could shrink under either GOP proposal. Plus, the value of deductions could be capped for those taxpayers who continue to itemize and reduced further if marginal tax rates are cut — deductions generally are more valuable when rates are high.



All this points to taking as many deductions this year as possible. Pagnato offers examples such as prepaying state income taxes, mortgage interest and real estate taxes if you can, while possibly making larger than normal charity donations.

"Use them or lose them" could be the key tax-planning mantra for the rest of 2016.