Courtesy Herzog Law Firm
How can you best tax plan in 2017? Will the proposals of the Trump campaign impact your immediate plans? The answer is “depends.”
There are certain changes that were already scheduled to happen in 2017 irrespective of the election results. In addition, while there will be more changes if President-Elect Trump’s proposed tax plan gets passed, most would not take effect until 2018.
Individual income tax – brackets and rates
Currently, there are seven income tax brackets and they are expected to remain in place in 2017. Income tax rates range from a low of 10 percent to the maximum of 39.6 percent. For married couples, the maximum tax rate of 39.6 percent will apply only after adjusted gross income reaches $470,700. Capital gains will continue to be taxed at 0 percent, 15 percent or 20 percent, depending on your income level.
If the tax proposals Trump’s campaign presented were enacted, it would simplify the tax code by reducing the number of income tax brackets from seven to three (12 percent, 25 percent and 33 percent), with the highest bracket starting when adjusted gross income reaches $225,000 for a married couple.
This would result in a significant reduction in taxes collected overall, however results at specific income levels would vary depending on the deductions and credits that would be available to each taxpayer. Capital gains tax rates would remain the same under Trump’s plan.
Individual income tax – deductions and misc.
The annual standard deduction gets a small increase in 2017, up to $6,350 for individuals and $12,700 for married couples. The personal exemption amount did not change and remains at $4,050 per person. Taxpayers have the choice of using either the standard deduction or the itemized deduction (whichever is higher).
Itemized deductions include things such as medical expenses, mortgage interest, real estate taxes and charitable contributions. The Trump tax plan proposes replacing the current standard deduction and personal exemption with a standard deduction of $30,000 for married couples, and $15,000 for individuals. For many, the standard deduction would be higher than their itemized deductions and would result in a large increase in tax deductions.
Other Trump tax plan benefits would include repealing the alternative minimum tax, repealing the net investment income tax, and giving parents a yet to be determined deduction for child care expenses.
Retirement considerations
One of the best ways to save money for retirement is to contribute to a 401(k) plan or an IRA. For 2017, the contribution amounts did not change. The maximum amount you can contribute to your 401(k) plan is $18,000, plus an additional catch-up contribution of $6,000 for individuals over the age of 50. The 2017 contribution limit for an IRA is $5,500, plus an additional catch-up contribution of $1,000 for those over age 50.
For those who are taking required minimum distributions (RMD) from their IRA accounts (because they are over the age of 70 ½) a great planning opportunity still exists. If you do not need all of your RMD to live on, you can contribute all or part of the RMD to charity and you will not be taxed on that portion of the RMD which is donated to charity.
Estate tax
Currently the federal estate and gift tax exemption is $5,490,000 for individuals and $10,980,000 for couples, and the estate tax rate for estates above that amount is 40 percent. It is estimated that only 1 percent of the population pays estate tax.
Trump’s tax plan would eliminate the estate tax entirely, and possibly replace it with a capital gains tax imposed at death. The proposed law would likely only apply to estates over $10 million, and would subject all assets owned at death to a capital gains tax, which at a maximum rate of 20 percent would be lower than the current estate tax rate of 40 percent.
Gift tax
The annual gift tax exemption amount remains at $14,000 for 2017. This means that an individual can give up to $14,000 per person without having to report the gift on a gift tax return. However there is no gift tax to actually pay unless one’s cumulative lifetime gifts exceed the current federal estate and gift tax exemption of $5,490,000.
In addition to the $14,000 annual exemption, parents and grandparents can make gifts directly to a school for education and this does not count towards the $14,000 annual limit. Another option is for parents and grandparents to make gifts to a 529 plan, which can be used for the child’s education.
You can “front load” contributions to a 529 plan by donating $70,000 in one year, and spreading the gift over the next 5 years so that you are gifting $14,000 per year.
There are many tax savings opportunities available for 2017 and beyond. Make sure to stay informed and to take advantage of them before the tax laws change.
Schaeffer is a senior associate with the Herzog Law Firm.