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Oxford Financial Group, LTD


Oxford Financial Group, LTD


Expert Perspective

News, research and market insights from our team of experts.


Current Issue | December 20, 2018

Planning Considerations in Anticipation of Tax Reform

By: Julia Weaver, J.D.,, Director, Family Office Services and The Trust Company of Oxford and
Scott Simmons, J.D., LL.M., Wealth Strategist, and Susan Hagley, MST, Wealth Planner

With the election of President-elect Donald Trump and the House and Senate each retaining Republican majorities, individuals and their advisors must now consider the impact of tax-reform proposals on their current and future income and estate tax planning. While each proposal must go through the legislative process and could be modified greatly by Congress before becoming law, the plans do provide a starting framework for understanding the impact on families' current wealth planning.

Income Tax Planning Considerations

Estimate your Adjusted Gross Income (AGI).

Have your tax advisor help estimate your AGI. Your AGI will help determine your tax bracket and also the impact of various AGI limitations on income tax deductions. For example, miscellaneous itemized deductions are deductible only to the extent that they exceed 2% of AGI and medical expenses are subject to a 10% (7.5% if you are 65 and older) AGI limitation. The concept of “bunching” these expenses into 2016 may allow you to exceed the threshold.

Another planning idea involves reducing AGI in order to avoid the phase-out rules. If your AGI exceeds the applicable threshold, certain deductions are reduced by 3% of the AGI amount that exceeds the threshold (but the reduction cannot be more than 80% of the deductions). All itemized deductions are subject to this limitation with the exception of medical expenses, investment interest expenses, casualty and theft losses and gambling losses. Strategies to reduce AGI include contributing to a retirement plan or health savings account.

Along with this discussion of planning strategies around AGI and maximizing itemized deductions, keep in mind that under President-elect Trump's plan, itemized deductions would be capped at $100,000/$200,000 for single/married filing jointly while the House plan would eliminate all itemized deductions other than mortgage interest and charitable contributions.

Accelerate deductions and defer income.

Both the House and Trump plans would have three tax rate brackets: 12%, 25% and 33%, with slight variations on the upper limits of each bracket. They also would repeal the .9% additional Medicaid tax and the 3.8% Medicare surtax on Net Investment Income.

If you believe that these reduced rates are likely for 2017, you may wish to accelerate deductions into 2016 and defer income to 2017. For example, you may consider deferring bonuses, consulting or other self-employment income, U.S. Treasury bill income, and retirement plan distributions (to the extent they are not required or subject to early-withdrawal penalties). You may also be able to accelerate state and local income taxes, real estate taxes, charitable contributions and interest payments.

Additionally, because short-term capital gains are taxed as ordinary income, it is particularly meaningful to avoid the unnecessary recognition of short-term gains in 2016. Notably, gains on investments held for less than one year would trigger this short-term gain treatment.

Recognition of long-term capital gains is also an issue for reconsideration for year-end 2016. Currently, the top rate of 20% comes in at a taxable income threshold of $466,950 (for married filing jointly taxpayers). Under President-elect Trump's proposal, the long-term capital gains rate threshold of 20% (from 15%) would actually come in at a much lower taxable income level of $225,000 for that same married filing jointly taxpayer. Hence, for certain taxpayers within this range, it may make sense to accelerate recognition of some long-term gains into 2016.

Consider tax-loss harvesting to lower capital gains tax.

By selling investment positions that are down this year, you can use the losses to reduce up to $3,000 of taxable income. If your total losses surpass $3,000, you can roll over excess losses to offset gains in another year. If you have losses from a previous year, calculate with your tax advisor how they affect your gains or losses from this year.

Avoid inadvertent "wash sale" transactions.

A wash sale is the sale of an asset followed by a repurchase of a similar asset within 30 days. The IRS does not allow capital losses on wash sales; if you have already made a wash sale, do not plan on the capital losses being available for tax use this year. It is important to consider this rule when discussing this strategy with your Oxford team as it will have an impact of the effectiveness of tax-loss harvesting.

Review your tax withholdings.

If you have had a major life change, such as an employment change, marriage or divorce, or a new child, you should review your tax withholdings. You may need to file a new Form W-4 with your employer. Insufficient withholdings can lead to tax penalties. Conversely having too much withheld prevents you from accessing your money until your tax refund is issued.

Charitable Giving

Donate to charity by year-end.

Charitable donations are generally deductible and can lower taxable income. There are, however, limitations based on the type of property donated and the type of charity. If your donation is subject to limitations, you can carry forward the excess deduction for up to five years.

One common planning idea is to gift appreciated long-term stock to a charity rather than short-term stock to benefit from a deduction based on fair market value instead of tax cost. The other benefit is that you can deduct the fair market value and avoid the capital gains tax if you had sold the stock. Be mindful to also avoid donating stock that is worth less than your basis. Instead, sell the stock so that you can deduct the loss and then donate the proceeds to charity.

It is important to make sure the donation is made in time in order to deduct it in 2016. Cash and checks must be received by the charity by December 31, 2016. If you mail a check, it must be postmarked by December 31, 2016 or earlier, and it must be received by the charity in the ordinary course of delivery. If you use a credit card, the charge must occur by December 31, 2016, regardless of when you pay your credit card bill. If you gift stock, title generally must be transferred (the process usually takes 1-2 business days) by December 31, 2016.

Reduce your estate through tax-free gifts.

You are permitted to give up to $14,000 ($28,000 for married couples) a year per recipient free of gift tax. Gifts above this value will consume part of your lifetime gift/estate tax exemption amount ($5,450,000 in 2016). Gifts of medical and educational expenses (a/k/a "Med-Ed" gifting) may also be made on a tax-free basis, provided, however, the payment is made directly to the educational or medical institution and are for only qualified expenses. Notably, qualified medical expenses also include payments of health insurance when paid directly to the insurance carrier. Under these circumstances, these "gifts" will go untaxed no matter what the value.

Consider a Charitable Rollover.

Once an individual reaches age 70 ½ and is required to begin taking minimum distributions from their IRA, they may take advantage of this provision. The individual can make up to $100,000 a year in gifts to a public charity directly from their IRA. Those gifts count towards the required minimum distributions they must take annually from their traditional IRAs, but are not included in their AGI. There are some caveats that should be discussed with your tax advisor.

Estate Planning

Review estate planning documents.

The outcome of the election created much uncertainty around estate planning. Both President-elect Trump and the House call for the elimination of estate and generation skipping taxes. In addition, President-elect Trump calls for replacing it by eliminating step-up cost basis at death and creating a new tax on pre-death appreciation subject to a $10 million exemption per married couple. In addition, charitable gifting at death of appreciated assets to private foundations would be disallowed.

In light of this uncertainty, you may wish to have your estate planning documents reviewed for any opportunities to enhance flexibility. This may include enhancing Trustee provisions to include Trust Protectors and Independent Trustees to provide flexibility to adjust certain trust terms, including the ability to amend dispositive provisions (and distributions), and limit or expand beneficiaries under certain circumstances.

Family Funding

Check your flexible savings account (FSA).

The government only permits a $500 annual rollover in an FSA; any excess funds disappear if unused by the end of the year. If your company's plan does not allow for the $500 carryover into the next year, or the 2 ½ month grace period into the next year to utilize contributed funds, you may want to schedule necessary medical or dental procedures before the end of the year to use up your remaining FSA balance.

Check your health savings account (HSA).

HSA funds do not disappear at the end of each year like with an FSA; however, many with few medical needs discover money accumulating in their HSAs much faster than they are using it. Consider reducing your contributions to your HSA if your account has reached a comfortable amount and you know of better uses for your money. Or, if you meet the requirements of an HSA but have yet to open one, consider this another vehicle to lower AGI. Contribution limits for 2016 are $3,350 for a single filer, $6,750 for a family and a $1,000 "catch-up" contribution for participants age 55 or older).

Consider contributions to a 529 plan for your heirs.

529 plans allow you to make contributions to a tax-free account that may be used to pay for qualifying secondary education expenses. Most states offer a tax credit for contributions in respect to certain limits. Always reach out to your tax advisor and/or your Oxford team for assistance in analyzing the risks and benefits of each respective plan.

Retirement Accounts

If you are retired, make sure you have taken all necessary required minimum distributions (RMDs).

RMDs may be one of the most important items to review when going over your finances at the end of the year. Standard IRAs require these distributions be taken annually after the year you turn 70 ½; standard 401(k)s require them annually after you retire or turn 70 ½ (whichever is later). Failure to take an RMD will trigger a 50 percent excise tax on the value of the RMD.

If you turned 70½ in 2016, you may take your first RMD anytime from January 1, 2016 to April 1, 2017. However, this does not mean that you should necessarily wait until April. If you withdraw your 2016 RMD in 2017, you still have to take your 2017 RMD by December 31, 2017. That would equate to two IRA distributions taxed in the same year.

If, however, you believe that tax reform will be implemented in 2017, it may be wise to defer your first RMD until after the first of the year in order to partake of the anticipated lower income tax rates.

Consider waiting to convert a traditional IRA to a Roth IRA.

If you believe that tax reform will result in a lower tax rate for you in 2017, it may be prudent to delay converting your traditional IRA to a Roth IRA, in order to pay the associated tax in the 2017 tax year at lower anticipated rates. Once converted, however, you also receive the benefit of these newly-converted funds to grow tax-free. This strategy is also used to potentially reduce income tax burdens on beneficiaries.

Maximize contributions to an IRA and employer retirement plan for the year.

Both IRAs and 401(k)s have annual contribution limits. If you find you have excess savings and have not reached your annual limit, it may be a good idea to make additional contributions. Similarly, you may also consider making greater monthly contributions to your accounts next year, spreading out the cost of contribution. The deadline for IRA contributions is usually April 15 of the following year; 401(k) deadlines may be restricted to the calendar year, depending on your employer.

Divide an inherited IRA.

If you inherited an IRA from a decedent who died in 2015, and if there are multiple designated beneficiaries, it could be advantageous to create and fund separate accounts by December 31, 2016. This may allow the IRA distribution schedule to be governed by each beneficiary's life expectancy, rather than using the oldest beneficiary's life expectancy for everyone.

Final Thoughts - An Exercise in Collaboration

Even though the Republican Party controls the White House as well as majorities in the House and Senate, it does not automatically mean that these proposals will become law. The majority in the Senate is not filibuster proof and therefore some collaboration and negotiation is likely. Individuals should be aware of the progress of these proposals and the impact on their current planning if enacted. Other non-tax related reasons for structuring wealth and estate plans may now take center stage.

Personal income tax planning is a collaborative effort with an individual's entire team of advisors. Legal and tax advisors should be consulted before taking action on any recommendations. When successful, however, the management and timing of income recognition, deductions and various tax strategies can have a dramatic impact on your family's tax exposure. Your Oxford team of advisors stand ready to assess strategies for your unique situation.

The above commentary represents the opinion of the authors as of 12.15.16 and is subject to change at any time due to market or economic conditions or other factors. This information is not intended to serve as tax or legal advice. As always, tax and legal counsel should be engaged before taking any action.