The results are in, so what post-election tax planning strategies should you consider as you look ahead to 2017? While the fate of existing tax breaks remains unknown, several changes to tax laws are the horizon based on proposed legislation outlined by President-Elect Donald Trump throughout his campaign. Additionally, the year end is expected to bring a rush of tax-related legislation by the “lame-duck” Congress-or by the new Congress in 2017. To help reduce your tax impact before year end, consider the following tax-planning strategies based on incentives introduced or expected to expire in 2016:

Individual Tax Planning

Taxes on investments. The net investment income tax (NIIT) went into effect in 2013 and is a Medicare surtax of 3.8 percent on the lesser of net investment income or modified adjusted gross income for higher-income households. The threshold amount is equal to $250,000 modified adjusted gross income for joint returns, $125,000 for a married taxpayer filing a separate return and $200,000 for other filers. For taxpayers with income levels above the threshold amounts, an additional 0.9 percent on wages will be imposed.

Distributions from IRAs, pensions, 401(k) plans, tax-sheltered annuities, and eligible Code Sec. 457 plans are excluded from net investment income and from the NIIT. NIIT is not imposed on income derived from a trade or business, nor from the sale of property used in a trade or business.

Increased long-term capital gains and qualified dividends rates. The special tax rates on long-term gains and qualified dividends were extended with the American Taxpayer Relief Act of 2012. The maximum tax rate on long-term capital gains is 20 percent for individuals, and up to 23.8 percent for higher income individuals. The tax rate remains at 15 percent (or zero if a taxpayer is in the 15 percent tax bracket) for all other individuals.

Pease limitation. The Pease limitation on itemized deductions for 2015 will kick in on Adjusted Gross Income (AGI) levels that exceed $311,300 for joint filers and $259,400 for individuals. Income over the threshold amount will trigger an itemized deduction limitation that is the lesser of:

  • 3 percent of AGI over the applicable amount, or
  • 80 percent of total itemized deductions

Often tax savings can be realized by lowering income in one year at the expense of realizing a bit more in the other: in this case, either 2016 or 2017.

Estate and gift planning. The American Taxpayer Relief Act of 2012 made the federal gift, estate and generation-skipping transfer tax provisions permanent as of December 31, 2012. In 2016, the federal and estate tax exemption increased to $5.45 million. Married couples can transfer up to $10 million through lifetime gifting and at death. With the increased exemption amounts, those who did not take advantage of the increased giving in prior years still have the opportunity to do so. In addition, the amount for annual tax-free gifts remains at $14,000 per recipient each year.
Proposed regulations introduced in August 2016 may eliminate most valuation discounts on redemptions and transfers of family business interests, so consider taking advantage of this tax savings opportunity now.

Business Tax Planning

Protecting American’s from Tax Hikes Act of 2015(PATH Act). Passed in January 2016, the PATH Act made permanent many of the previously temporary tax breaks and extending many others, including:

  • Section 179 expensing and bonus depreciation. The Section 179 deduction dollar limit of $500,000 was made permanent for business owners who can use this election to expense (rather than depreciate over a number of years) the cost of purchasing such assets as equipment, furniture and off-the-shelf computer software. Additionally, bonus depreciation has been extended at 50 percent through tax year 2017.
  • Research and Development (R&D) tax credit. The R&D credit has been made permanent. The credit may also now be used to offset Alternative Minimum Tax, which was not the case in previous years. The credit generally is equal to 13 percent of qualifying costs. For example, for each $100,000 in qualifying costs, the credit is $13,000. To qualify for this credit, businesses must prove their efforts and intellectual capital designed, considered or actually created something new, or at a minimum, incrementally changed something so it is now considered now.
  • Work Opportunity Credit (WOTC). WOTC was extended and has been expanded to employers who hire qualified long-term unemployment recipients.

Section 199 Deduction. The manufacturers’ deduction, also called the Section 199 or domestic production activities deduction, has been fully phased in and is now 9 percent of the lesser of qualified production activities income or taxable income. The deduction isn’t allowed in determining net earnings from self-employment and generally can’t reduce net income below zero, but it can be used against the AMT.

Final repair/capitalization regulations. The Internal Revenue Service (IRS) recently issued long-awaited comprehensive final rules on the treatment of payments to acquire, produce or improve tangible property. Beginning in 2016, businesses may elect a de minimis safe harbor of up to $2,500 for amounts paid to acquire or produce tangible property (with some exceptions).

What’s on the Horizon?

During the campaign, Trump introduced a plan for his first 100 days of administration. Key tax provisions include:

Middle Class Tax Relief and Simplification Act. Provide middle-class families with two children a 35 percent tax cut and lower the “business tax rate” from 35 percent to 15 percent.

Affordable Childcare and Eldercare Act. Allow individuals to deduct childcare and elder care from their taxes, incentivize employers to provide on-site child care and create tax-free savings accounts for children and elderly dependents.

Repeal and Replace Obamacare Act. Fully repeal the Affordable Care Act and replace it with health savings accounts.

American Energy and Infrastructure Act. Leverage public-private partnerships, and private investments through tax incentives, to spur $1 trillion in infrastructure investment over 10 years.

For more information on tax planning strategies to consider before year end, contact Doeren Mayhew’s tax advisors today.