Individual income taxes are likely in for a major overhaul next year under president-elect Donald Trump and a Republican-controlled Congress.
The drums have been beating for years, with detailed plans from Republican leadership that
call for slashing individual income tax rates, reducing itemized deductions and raising the standard deduction. While some details differ, Trump’s plan largely promised the same.
The biggest change for many — besides reduced rates — would be in deductions.
The standard deduction is currently $6,300 for single filers and $12,600 for most married couples. House Speaker Paul Ryan wants to double those amounts; Trump’s plan would go even farther and raise the standard deduction to $15,000 for a single filer and $30,000 for married couples.
One clear effect would be that it becomes much more attractive for many filers to take the standard deduction than to itemize.
There also may be cuts in how much you can deduct through itemization. Trump has said he would cap itemized deductions at $100,000 for single filers and $200,000 for married couples. Ryan’s plan would eliminate all itemized deductions except for charitable gifts and mortgage interest. Another plan by Dave Camp, R-Michigan, former chairman of the House Ways and Means Committee, would do the same but go a step farther and impose new limits on deductions for charitable gifts and mortgage interest.
For most taxpayers, the deductions that mean the most are for state and local taxes, charitable gifts and mortgage interest. For some, the medical deduction is significant.
While only 30 percent of taxpayers itemize, those who do should consider some year-end moves that take advantage of deductions while they still have value.
Here are some examples to discuss with your CPA:
Consider pre-paying the Tennessee Hall Tax before Dec. 31, 2016
If the Hall Tax deduction (which is an income tax on interest and dividends) is even available for 2017, it may not exceed the potentially increased standard deduction for many taxpayers. Making the payment this year ensures the taxpayer will get the benefit of deducting the state tax payment.
Accelerate charitable donations into 2016
Deductions for charitable donations in 2017 could have less value. Taxpayers who give heavily but don’t want the charity to get the donation this year might consider a donor-advised fund. These funds allow givers to take deductions in one year and make grants from the fund over time. They are easy to set up, relatively inexpensive to manage and have grown in popularity so much that the National Philanthropic Trust reports they now have nearly $80 billion in total assets.
Gift publicly held securities that have appreciated in value
This is an exceptional but largely underused strategy. You need to ensure the security has been held long-term. This gifting approach gives taxpayers two benefits: they get the charitable deduction for the fair market value of the security rather than the lower cost basis and they do not have to pay capital gains rates on the eventual sale of the appreciated security. Taxpayers can also put the security in a donor-advised fund where it can be sold tax-free and proceeds can then be donated to the charities of the donor’s choice.
Eliminating the mortgage interest deduction — or reducing it — could still face intense lobbying from the real estate industry. But it’s likely that the value of this deduction will continue to shrink, as it has in recent years with the increase of the standard deduction. This is one deduction, however, that can’t be accelerated. Pre-paid interest can’t be deducted.
Overall, tax changes are in the wind, and understanding how they affect your individual situation could save you money.