Tax planning got a lot more complicated after the 2016 U.S. presidential election. Donald Trump's victory meant that taxpayers looked closely at the Trump tax plan for a clue about what would be coming down the road, and a Republican-controlled Congress seemed to make it a near-certainty that tax reform packages would become law.

In order to take maximum advantage of anticipated tax changes, many taxpayers used a simple strategy designed to save them money on their tax bills in the long run. That strategy has thus far turned out to be a bust, because tax reform hasn't yet passed and is extremely unlikely to apply retroactively to the 2017 tax year. Yet as December approaches, taxpayers are once again wondering whether it makes sense to try again.

The White House with fountain and green lawn, with the Washington Monument in background.

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Betting on tax reform

Many taxpayers chose late last year to take steps to reduce their taxable income to the maximum extent possible for the 2016 tax year. The idea was simple: Although the current tax system had rates that ran as high as 39.6% and also included surcharge provisions and various other unpopular tax levies, the Trump proposal had a simpler system with lower rates and also proposed eliminating many unpopular taxes. Even under the current proposal, which has seen increases compared to the president's initial plan before the election, maximum rates of 35% would provide high-income taxpayers with substantial savings. The elimination of key provisions like the alternative minimum tax and the tax surcharges associated with the Affordable Care Act would lead to further tax savings.

To do so, taxpayers had several options at their disposal. They could do a combination of the following:

  • Accelerate deductible expenses into 2016 to claim them on their 2016 tax returns.
  • Delay selling stocks with taxable gains until 2017.
  • Take tax losses on money-losing investment positions before the end of 2016.
  • For those with control over their income, arrange to have business receipts come in after the beginning of the New Year.

None of these strategic moves was particularly new, and many taxpayers had used them year in and year out just to be able to hold off on paying taxes for an additional year. With actual differentials in tax rates expected to be in place, the strategy could have paid off to an even greater extent.

Take two for pushing income forward

Taxpayers' decisions last year to defer income until 2017 turned out not to be a winning strategy because tax reform didn't move forward until very recently. It took the White House much longer than expected to deal with healthcare reform, and even now, no final decision on that front is in place. Now, officials in Washington are scrambling just to get tax reform finished by the end of the year, because otherwise, it will call into question whether any eventual changes that lawmakers agree upon will take effect before 2019. It's almost certain that the same tax rates that applied in 2016 will continue to apply in 2017, and that will mean that most taxpayers will see little or no benefit to having pushed income into the 2017 tax year.

If you think that tax reform is more likely to get done by the end of this year, then it makes sense to consider trying the tax deferral strategy one more time. Yet there's some danger involved, because the exact aspects of the tax reform proposal aren't yet fully known. For some people, the elimination of certain tax breaks could put them in a position where it makes sense not to defer income into future years. Until the final version of the Trump tax plan is known, taxpayers will be left having to speculate about what will make it into a final bill.

Do the best you can

Tax planning is always challenging, and trying to anticipate tax law changes can be almost impossible. Your best option at this point is to give yourself the flexibility to deal with potential tax changes whichever way they end up going, and then make a final decision closer to the end of the year. Jumping the gun based on hopes and speculation could lead to the same failures that taxpayers suffered this year.

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