One month after the presidential election, taxpayers are learning more about President-elect Donald Trump’s tax proposals for his administration. Although exact details, including legislative language, are likely months away, taxpayers have a snapshot of the president-elect’s tax proposals for individuals and businesses.

Note. At the time this article was prepared, the primary descriptions of President-elect Trump’s tax proposals are on his campaign and transition websites. The materials on these websites are not the same as legislation, which would amend the Tax Code. Rather, they discuss the President-elect’s tax proposals in very general and broad language.

Tax reform

Tax reform has been a regular topic in recent years. Click Here for Full Video/Article (Members Only)

Permanent Extensions for Individuals

Incentives for individuals extended permanently, and in some cases modified, by the PATH Act include:

• American Opportunity Tax Credit
• Deduction for certain expenses of elementary and secondary school teachers
• Parity for exclusion from income for employer-provided mass transit and parking benefits
• Deduction for state and local sales taxes
• Reduced earnings threshold for additional child tax credit
• Modification of the earned income tax credit
• Tax-free distributions from individual retirement plans for charitable purposes for individuals age 70 ½ and older
• Special rule for qualified conservation contributions

For some of the incentives, the modifications are significant. For example, the deduction for qualified expenses of elementary and secondary school teachers has been modified to include professional development expenses. Please contact our office for more details.

Permanent Extensions for Businesses

The PATH Act makes permanent, and in some cases modifies, many popular tax incentives for businesses, including:

• Research tax credit
• Enhanced expensing under Code Sec. 179
• Charitable deduction for contributions of food inventory
• Tax treatment of certain payments to controlling exempt organizations
• Extension of basis adjustment to stock of S corporations making charitable contributions of property
• Employer wage credit for employees who are active duty members of the uniformed services
• Extension of 15-year straight-line cost recovery for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements
• Treatment of certain dividends of regulated investment companies
• Exclusion of 100 percent of gain on certain small business stock
• Reduction in S corporation recognition period for built-in gains tax
• Subpart F exception for active financing income
• Temporary minimum low-income housing tax credit rate for non-federally subsidized buildings
• Military housing allowance exclusion for determining whether a tenant in certain counties is low-income
• Extension of RIC qualified investment entity treatment under FIRPTA

As with the individual incentives, some of the modifications to the business incentives are significant. The research tax credit is not only made permanent, it is enhanced for small businesses. Expensing under Code Sec. 179 is made permanent at generous dollar and investment limitations. Previous limitations for the employer credit for activated reservists are relaxed. For more details, please contact our office.

More Incentives Extended

The PATH Act did not leave out the rest of the traditional extenders. However, lawmakers did not make these remaining tax breaks permanent. Extended for several years (in some cases through 2019, in other cases through 2016) are:

• bonus depreciation,
• the Work Opportunity Tax Credit (WOTC),
• the higher education tuition and fees deduction,
• energy incentives, the Indian employment credit,
• special expensing rules for television and film productions,
• and more.

Because the extensions are not uniform, as mentioned, some tax breaks are extended through 2019 and others are extended through 2016, careful planning is vital.

The approach of year-end 2015 makes it tax planning season. Tax law developments in 2015 can affect, for example, the deduction of costs and expenses, the treatment of contributions to tax-favored accounts, and the inclusion of certain benefits in income. Traditional year-end planning techniques for investments and retirement are also important. Small businesses also have some tools for year-end tax planning. Although it may seem early to contemplate year-end planning, the remaining weeks of 2015 will pass quickly and taxpayers need to be proactive.

Investments

Taking inventory of gains and losses at this time to map out a year-end buy, sell or hold strategy later makes particular sense. Investors should note that immediate losses in the stock markets do not necessarily translate into tax losses. The fact that assets purchased several years ago may still yield taxable gains because of low basis, and the existence of the wash sale rule if a stock is purchased within 30 days before or after a sale, should be considered in assessing current tax positions.

Taxpayers should also remember the higher tax rate environment that is now in its third year. Not only has the top rate jumped to 39.6 percent for ordinary income (and short-term capital gains) but the rate for long-term capital gains and qualified dividends has increased from 15 to 20 percent. Furthermore, a 3.8 percent net investment tax applies to taxpayers with income above a non-inflation-adjusted threshold ($250,000 for married taxpayers filing jointly; $125,000 for married taxpayers filing separately; and $200,000 for all other taxpayers).

Saving for retirement

Although most IRA contributions for a particular year may be made until the filing date for that year, other deadlines are at year end, such as contributions to 401(k) plans and Roth conversions and re-conversions. Required minimum distributions for retirees and those over age 70 ½ also generally carry a year-end distribution date beyond which a penalty applies. One exception allows an individual turning age 70 ½ to delay starting distributions until April 1 of the year following the year in which the individual turns 70 ½.

Small businesses

Many small businesses have relied on the generous Section 179 deduction, which is now up for renewal as part of the extenders legislation, to gain an immediate write-off for equipment, rather than follow depreciation schedules. One alternative now available to many businesses is the de minimis safe harbor threshold amount under the final so-called “repair regs.” Currently, a de minimis safe harbor under the repair regulations allows taxpayers to deduct certain items cost $5,000 or less (per item or invoice) and that are deductible in accordance with the company’s accounting policy reflected on their applicable financial statement (AFS). IRS regulations also provide a $500 de minimis safe harbor threshold for taxpayers without an applicable financial statement.

New tax laws

So far this year, Congress has passed and President Obama has signed several tax bills. Two new laws impact tax planning for public safety officers. The Don’t Tax Our Fallen Public Safety Heroes Act clarifies that both federal and state benefits for public safety officers fallen or injured in the line of duty are treated the same in the tax code and are not taxable. The Defending Public Safety Employees’ Retirement Act affects retirement planning. Generally, taxpayers who receive an early distribution from a qualified retirement plan are subject to a 10 percent penalty, unless an exemption exists. The Defending Public Safety Employees’ Retirement Act expands the exemption to include certain federal law enforcement officers, federal firefighters, customs and border protection officers, and air traffic controllers.

Late last year, Congress passed the legislation creating A Better Life Experience (ABLE) accounts. States are now enacting enabling legislations, which along with federal law, will allow ABLE accounts to be set up for qualified individuals with disabilities (who became disabled before age 26) for tax years beginning after December 31, 2014. Contributions in a total amount up to the annual gift tax exclusion amount, currently $14,000, can be made to an ABLE account on an annual basis, and distributions are tax-free if used to pay qualified disability expense

One bill that has not yet passed is legislation to extend the so-called tax extenders. The Tax Increase Prevention Act of 2014 (TIPA) only extended these popular but temporary tax breaks for 2014. The expired extenders include the state and local sales tax deduction, higher education tuition deduction, transit benefits parity, research tax credit, the work opportunity tax credit, and many others. The extenders are likely to be renewed for 2015 but Congress may wait till December to pass a bill. Our office will keep you posted of developments.

If you have any questions about year-end tax planning, please contact our office. We can develop a personalized year-end tax planning strategy.