Nov. 8 will finally end the uncertainty over who’ll become the next U.S. president (barring recounts, of course). But it will start the uncertainty over how much of your income will be taxed in 2017 and beyond.
Donald Trump is proposing to cut all kinds of federal taxes by $6 trillion over 10 years. Hillary Clinton is proposing policy changes that would raise taxes by about $1.4 trillion over 10 years.
With most polls favoring Clinton, a lot of people (and their financial advisers) may be assuming she does prevail and asking such questions as: Should I sell stocks now? Should I “realize” income this year when tax rates could be lower than they might be in coming years?
Calm down. Many “if’s” will need resolving before you should heed any advice to take specific, irrevocable actions with your money right now. First, Clinton has to win. And down-ballot elections must produce enough new Democratic seats in Congress to give Clinton a fighting chance of actually passing new tax rules.
Still, here are a few of the tax-planning moves that you might consider discussing with an adviser after Election Day. Each is based on a major plank in Clinton’s tax proposals, as listed on her campaign website.
TAX HIKE #1: Fair Share Tax Surcharge: Clinton wants an additional 4 percentage point tax on people whose adjusted gross income exceeds $5 million. If you’ve worked hard enough and taken risks such that your income will be this high in 2017 (it was for about 34,250 taxpayers in 2013, the latest year for which complete tax data are available), it might make sense to consider transactions that generate income in this tax year versus realizing the income in 2017.
CONSIDER THESE MOVES: Executives who’ve received stock options and other forms of equity-based compensation, for instance, could exercise options or sell some stock this year instead of in 2017 or 2018, when taxes on their incomes could be much higher. Business owners might push harder to collect on invoices before year-end, instead of allowing clients and customers to pay them in January. By the way, over 50 percent of all taxes come from these taxpayers, who as a group make up less than 1 percent of all taxpayers, so I think this group is paying a “fair share” already.
POTENTIAL TAX CHANGE #2: Minimum Tax of 30 percent of AGI: This would impose a minimum effective tax rate of 30 percent on AGI over $1 million and would be phased in between the first $1 million and $2 million of AGI. This proposal has been called the Buffett Rule, because Warren Buffett famously declared that although he paid significantly more in taxes, his effective tax rate was lower than that of his secretary.
In 2013, about 346,000 taxpayers reported an AGI of $1 million or more. But Buffett has a point. Due to the way certain categories of income are taxed (such as income generated by investment managers), some higher-income earners pay a total tax burden that’s less than 30 percent of their AGI. So this proposal amounts to an alternative minimum tax rate that would apply to people with AGI of $1 million or more.
CONSIDER THESE MOVES: Accelerating certain categories of income, such as income from investment activity generated by investment managers, into 2016 could be a smart financial move.
POTENTIAL TAX CHANGE #3: Limited Tax Benefit for Itemized Deductions: This proposal would limit the tax rate benefit of most deductions people claim for things like mortgage interest, property and state income taxes, etc. to 28 percent. So if your income is taxed in the 39.6 percent federal tax bracket, these deductions would generate a tax savings of only 28 percent. But it’s not yet clear if any income limits would apply to this proposed tax increase.
CONSIDER THESE MOVES: One strategy would be for people in the 33 percent, 35 percent and 39.6 percent tax brackets to prepay deductible items (such as making an extra mortgage interest payment, prepaying property taxes, etc.) to accelerate tax deductions into 2016.
POTENTIAL TAX CHANGE #4: Increased Rates on Capital Gains: Clinton’s proposals include a higher tax rate on realized capital gains for investments held less than six years. Currently the top tax rate on long-term capital gains (held one year or more) is 23.8 percent, but this would rise to 43.4 percent, which is a big increase. The tax rate would gradually decease to 27.8 percent for assets held five to six years and remain at the current 23.8 percent for assets sold that were held for six years of more.
CONSIDER THESE MOVES: Investors who hold large positions in securities or investment property with significant gains over the past several years might want to consider selling some of those assets now to realize those gains in 2016. This might also be a good investment move because the markets are near all-time highs, and taking some risk off the table and diversifying now could be a good idea.