Sunday, December 11, 2016

Planning for lower taxes next year

The terrific stock market rally last month with all four of the major indices — the Dow, Standard & Poor’s 500, NASDAQ and small-cap Russell 2000 — reaching all-time highs during November is, according to the media, almost totally the result of Donald Trump’s surprise win.

Yet I’d argue that the high consumer confidence (the best since 2007), better-than-expected third-quarter corporate profits, strong early holiday retail sales and increasing economic growth here and overseas have also helped propel our market upward.

Mario Dragi, the head of the European Central Bank, spoke to the European Parliament on Nov. 21 to report that the Eurozone is recovering at a moderate pace and that unemployment is declining.

After rising 3 percent in November, the S&P 500 now is up 10 percent this year (with dividends reinvested) through Nov. 30. After an incredible 15 consecutive up days, Nov. 4 to Nov. 26, the best winning streak since 1996, the small-cap Russell 2000 jumped 11 percent last month; it now has gained a terrific 17 percent for 2016’s first 11 months!

Certainly, stocks could continue to move higher this month as December is historically quite favorable — the S&P 500 has reached its calendar-year high 17 out of the last 31 years (1985 to 2015) in December.

Given Trump’s campaign promises and the total Republican control of Congress, it seems very likely that taxes will be lower next year.

Therefore, I would argue that whenever possible, employees with traditional pension plans should try to increase their contributions this month, given that tax-deductible savings this year should be more valuable than next year when taxes are lower.

(Those under age 50 have an annual 401(k) max of $18,000 while older employees, 50 and over, may tax shelter as much as $24,000.)

For anyone who is self-employed, the tax savings for funding a Simplified Employee Pension individual retirement account are phenomenal!

There are no FICA, Medicare, state or federal taxes since the pension contribution comes from the employer rather than the employee, even though it’s the same individual in a one-person business.

Up to $53,000 can be sheltered — 20 percent of individual income, or 25 percent if incorporated.

SEP contributors can wait until as late as Oct. 15 next year to fund their pensions for this year if the six-month tax extension is utilized.

If my likely scenario that taxes will be lower next year is correct, it even may be advantageous this year to choose a traditional tax-deductible IRA, if eligible, over the Roth IRA. The IRA maximums are $5,500 for people under age 50 and $6,500 for those age 50 or older.

Obviously, a Roth IRA conversion this year is not recommended! By April 15 next year, the last day to make an IRA contribution for 2016, new tax legislation may have become law or be close to passing.

(A recent survey of 2,000 American adults discovered that, when asked what was their worst financial decision they ever made, their No. 1 response was “not saving enough for retirement.”)

Other wise strategies are to give more to charity this month, prepay property taxes that are due next month before Dec. 31, and maximize any other deductions in order to reduce taxes as much as possible this year.

If you have a loss on a stock market investment, take it now rather than next year — you can write-off up to $3,000 annually against earned income.

If you have a big gain on a stock or mutual fund and plan to make significant charitable contributions, donate it this month while the market is high and your charitable write-off deduction is more valuable because of existing higher tax rates.

The best and most flexible way to do that is to open a Fidelity Giving Account, where the stock or mutual fund winner can be donated this year to get the tax deduction and disbursed in future years as you see fit — for as little as $50 per gift.

You can deposit the proceeds from the sale into a choice of seven different Fidelity Asset Allocation pools.

The investment pools range from a very conservative 20 percent stocks and 80 percent bonds to 85 percent equities and 15 percent fixed-income. Contact Fidelity for more details at (800) 262-6039 or go to

The problem for most of us is that we don’t think much about our taxes until we start accumulating all the information next year in order to file by the traditional April 15 deadline.

Given the high likelihood that most of us will be in a lower tax bracket next year, it can be very beneficial to use every avenue possible this month to lower our 2016 taxes.