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Post-Election Individual Tax Changes – Will it be a Happy New Year?

By December 14, 2016No Comments

President-elect Donald Trump made tax-reduction a focus of his campaign. In his “First 100 Days” in office, Trump and the GOP are expected to pass numerous tax acts that could impact your financial and tax planning for 2017.  These proposed changes could affect how you react to 2016 year-end planning.

The tax policies that the Trump administration is going to focus on in the first few months of his presidency include repealing and replacing the Affordable Care Act (Obamacare) and implementing acts designed to relieve the costs of childcare and eldercare. While there are currently seven tax brackets with the highest rate at 39.6%, Trump’s proposal reduces the number of tax brackets to three with the highest rate at 33%.

What changes will impact you the most?

To compensate for the lower tax rates, Trump is proposing to limit the amount of itemized deductions that can be claimed at $100,000 for single filers and $200,000 for married couples. He also wants to eliminate personal exemptions and the Head of Household filing status. Even though this limitation of deductions may force you to pay more income tax, it is important to realize that the repeal of the Affordable Care Act would eliminate the Net Investment Income Tax that you might be paying on your investment income.  Finally, Trump wants to eliminate the Alternative Minimum Tax (AMT). This could lead to additional savings if you are currently paying a significant amount of AMT.

In order to relieve the costs of childcare and eldercare, Trump is proposing to allow the creation of tax-favored savings accounts for children (and unborn children) and dependent care expenses. These accounts would be matched by a government contribution but would be subject to an annual contribution limit. If you incur a lot of expenses for childcare or are responsible for the care of an elderly relative, these accounts have the potential to be very advantageous for you.

What can you do to plan for these changes?

If you estimate your 2017 itemized deductions to be in excess of the proposed caps, you may want to consider prepaying some state taxes or accelerating charitable contributions to get the benefit this year.  There may be opportunity to defer ordinary income to what could potentially be a lower tax bracket year.  The best thing that you can do to plan for these changes is to have a conversation with your tax professional. If you have questions about this topic, or would like to discuss any other tax matter, please do not hesitate to contact us at (858) 558-9200.

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