I had the opportunity to organize and moderate a “Best Ideas Panel” at the recent AICPA Personal Financial Planning Conference. With four of the leading financial planning experts in the country, we spent time talking about what the attendees should be focusing on with their clients this year. Here is a summary of what we covered and things you should think about for 2016:
- Income Tax Extenders – Perhaps the two most important aspects of the tax package that Congress passed at the very end of last year were the Qualified Charitable IRA Distributions (QCD) and some changes to the 529 College Savings plans rules. Individuals who are charitably inclined and taking required minimum distributions will benefit from the ability to take up to $100,000 from your IRA and transfer it directly to charity. This allows you to avoid reporting that distribution as income. By reducing your Adjusted Gross Income, you might be able to increase the other deductions you are allowed that are limited by your adjusted gross income, like medical and miscellaneous investment expenses. It could also limit the deductions you would otherwise lose due to the phase out rules. This has now been made permanent in the tax law.
The 529 plan changes were seemingly minor, but you are now allowed to draw from the plans with the lowest basis first in order to minimize gain should a non-qualified distribution be necessary in the future. The tax law also now allows certain computer expenses to qualify to be taken from your 529 plan.
- Future Tax Legislation - Unless you've been living under a rock you probably already know we are in an election year! There is growing Republican and Democratic support for potential tax legislation and 2017 could be a tax reform year. The timing seems right as we went from 1954-1986 (32 years) and again 1986-2016 (30 years) without major reform. President Obama’s budget proposals have many tax changes in them. Obviously, these will face challenges along the way, but it is good to keep an eye on what has been proposed. Broadly, these include:
- Reducing tax benefits for high income taxpayers;
- New initiatives to bring jobs to the US;
- An increase in the estate tax;
- Closing of various perceived loopholes in the estate planning area;
- Reduction of some of the advantageous rules related to retirement accounts.
Of course, with a long list of potential candidates to be our next President, there are a wide variety of proposals from the leading candidates. Our current top individual tax rate is 39.6%, Bernie Saunders would push that up to 52% while Ted Cruz would eliminate the IRS and opt for a flat tax of 10%. Capital gains tax proposals vary from the current top rate of 20% to Hillary Clinton’s proposal that includes a 6 bracket system and a top rate of 39.6%. In the estate tax area, the current top rate is 40% and the federal exemption is $5.45 million. While several Republican candidates would eliminate the tax, Clinton would raise it to 45% and drop the threshold down to $3.5 million, while Sanders would raise it to 65% with the same threshold. Stay tuned, these will be important issues as the process unfolds.
- Investments - The markets have been more volatile recently and this can present opportunities for you to take advantage of. Selling asset classes when they are at a loss (tax loss harvesting) can be a great way to offset gains from other areas of your portfolio. We did this for our investment clients last year and there may be opportunities to do that again already this year. You can also consider strategies such as Roth conversions (better done when asset values are down so they generate less taxable income), making pecuniary bequests with high basis assets to reduce gain recognition, and Generation Skipping Trust (GST) allocations to older non-exempt trusts.
- Estate Planning - Take advantage of estate planning strategies now, while they are still available. In addition to an increase in the estate tax rate to 45% (from the current 40%) and a reduction to the exemption from the current $5.45 million down to $3.5 million, President Obama’s proposal includes the elimination of a number of estate planning “loopholes,” including the elimination of the Grantor Retained Annuity Trust (GRAT) strategy, the elimination of Dynasty Trusts with a maximum 90 year term, and a limitation of present interest gifts through Crummey powers.
- Retirement Planning - we have written about the changes to the social security rules already, but keep in mind that you do need to take action on some aspects of this by 4/30/16. It is also important to note that while the potential of rising interest rates may be causing volatility in the investment markets, higher rates will actually be a good thing for savers. It will also provide significant relief for insurance companies and should cause long term care insurance premiums to drop or at least stabilize.