Ever since the White House produced the one-page memo on April 26, 2017 outlining President Trump’s tax plan, individuals have wondered if potential changes in the tax law will impact them. To the wealthy, the stakes are high. Will the estate tax be repealed? Will the corporate tax rate decrease, and if so, by how much? Will there be a “tax holiday” whereby trillions of dollars legally held overseas by companies could potentially be repatriated to the United States at a low tax rate?
While uncertainty abounds, many commentators believe that a reduction in income tax rates (and possible repeal of the Net Investment Income Tax) is on the horizon. Can you take advantage of this presupposition? The answer is “yes,” if the circumstances are right.
Income Tax Planning Strategies to Consider Before Tax Rates Drop
If you are able, consider one of the following income tax planning strategies that may pay off if income tax rates decrease:
- Defer taxable events until tax rates have decreased (e.g., wait to sell your holding in an appreciated security, or delay a taxable withdrawal from a retirement plan).
- Sell depreciated assets before tax reform occurs to take advantage of higher tax rates in 2017.
- If deferral of a taxable event is not possible with respect to highly appreciated assets, consider an installment sale. Offering a payment plan to a buyer could help close a deal and delay payment of income until a later tax year with (theoretically) lower effective income tax rates.
- Consider an advanced estate planning vehicle, such as a Charitable Remainder Trust. You may wish to transfer highly appreciated assets to a Charitable Remainder Trust, instead of liquidating the appreciated assets now. If properly executed, you may be able to gift low-basis assets into a Charitable Remainder Trust, that can then sell the assets without incurring a capital gains tax. The income beneficiary of a Charitable Remainder Trust may also be able to participate in the upside in the event assets increase in value (future distributions will generally be taxable, although such distributions may theoretically be made in a lower income tax environment).
- In any tax environment, it is important to utilize strategies to reduce your taxable income. Contributions to certain retirement plans or flexible spending accounts may reduce your adjusted gross income.
- Carefully evaluate retaining income in irrevocable trusts. Income retained in an irrevocable trust is subject to the highest marginal tax rates for every dollar above the low threshold of $12,500 (in 2017, an individual taxpayer is not subject to the highest marginal rates until he or she reaches an income threshold of $418,400 filing individually or $470,000 married filing jointly). If you serve as a trustee of an irrevocable trust, you might consider altering your investment strategy (as permitted by the trust) until tax reform is implemented. You might also evaluate whether the terms of the trust instrument permit you to distribute income to beneficiaries that may pay tax at a lower marginal rate.