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Rozes, Gouveia & Company, LLP

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Steven Gouveia, CPA

2017 MIDYEAR TAX PLANNING

 

As we write this letter, the federal income tax rates for this year are still the same as last year: 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%. The rate bracket beginning and ending points are increased slightly to account for inflation. The maximum 39.6% bracket affects singles with 2017 taxable income above $418,400, married joint filing couples with income above $470,700, heads of households with income above $444,550, and married individuals who file separate returns with income above $233,350. Higher-income individuals may also be hit by the 0.9% additional Medicare tax on wages and self-employment income and the 3.8% Net Investment Income Tax (NIIT), which can both result in a higher than advertised marginal federal income tax rate. Finally, you must consider whether you are exposed to Alternative Minimum Tax (AMT). If so, tax planning moves that work for most folks may not work for you.

 

That's what we know right now. What we don't know is whether federal income tax rates will be changed by legislation enacted later this year and whether any rate changes that are enacted would take effect this year. Even with this uncertainty, there are some tax planning moves that should work regardless of what happens, if anything. There are other moves that you should be prepared to consider if tax changes are enacted. This letter presents some tax planning ideas to evaluate this summer while you have time to think. Some of the ideas may apply to you, some to family members, and others to your business.

 

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Time Investment Gains and Losses - Under the current rules, the 2017 federal income tax rates on long-term capital gains are the same as last year: 0%, 15%, and 20% for most categories of long-term gain. The maximum 20% rate affects singles with 2017 taxable income (including long-term gains) above $418,400, married joint filing couples with income above $470,700, heads of households with income above $444,550, and married individuals who file separate returns with income above $235,350. Higher-income individuals can also be hit by the 3.8% NIIT, which can result in an effective marginal federal rate of up to 23.8% (20% + 3.8%) on long-term gains. Under the Trump tax plan, the three rates on long-term gains would remain in place, but the 20% maximum rate would kick in at lower income levels. So, the same strategies for timing capital gains and losses should work regardless of what happens.

 

As you evaluate investments held in your taxable brokerage firm accounts, consider the tax impact of selling appreciated securities (currently worth more than you paid for them) before the end of this year. For most taxpayers, the federal income tax rate on long-term capital gains is still much lower than the rate on short-term gains. Therefore, it often makes sense to hold appreciated securities for at least a year and a day before selling in order to qualify for the lower long-term gain tax rate.

 

Biting the bullet and selling some loser securities (currently worth less than you paid for them) before year end can also be a tax smart idea. The resulting capital losses will offset capital gains from other sales this year, including high taxed short-term gains from securities owned for one year or less. Under the current rules, the maximum rate on short-term gains is 39.6%, and the 3.8% NIIT may apply too which can result in an effective marginal rate on short-term gains of up to 43.4% (39.6% + 3.8%). Future tax legislation could lower the maximum rate on short-term gains, but it will still be significantly higher than the rate on long-term gains. Whatever happens, you won't have to worry about paying a high rate on short-term gains that can be sheltered with capital losses because you will pay 0% on those gains.

 

Be Ready to Defer Some Income - It might also pay to defer some taxable income from this year into next year if you expect to be in the same or lower tax bracket in 2018. That would be more likely if tax rate reductions are enacted this year, but don't take effect until next year. For example, if you're in business for yourself and a cash method taxpayer, you can postpone taxable income by waiting until late in the year to send out some client invoices. That way, you won't receive payment for them until early 2018. You can also postpone taxable income by accelerating some deductible business expenditures into this year. Both moves will defer taxable income from this year until next year. Deferring income may also be helpful if you're affected by unfavorable phase-out rules that reduce or eliminate various tax breaks (child tax credit, higher education tax credits, and so on).

 

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Tax Smart Strategies for Small Businesses

 

Consider Selling Rather Than Trading in Business Vehicles - Although a vehicle's value typically drops fairly rapidly, the tax rules limit the amount of annual depreciation that can be claimed on most cars and light trucks. So, when it's time to replace a vehicle used in your business, it's not unusual for its tax basis to be higher than its value. If you trade the vehicle in on a new one, the undepreciated basis of the old vehicle simply tacks onto the basis of the new one (even though this extra basis generally doesn't generate any additional current depreciation because of the annual depreciation limits). However, if you sell the old vehicle rather than trading it in, any excess of basis over the vehicle's value can be claimed as a deductible loss to the extent of your business use of the vehicle.

 

Set up Tax Favored Retirement Plan - If your business doesn't already have a retirement plan, now might be the time to take the plunge. Current retirement plan rules allow for significant deductible contributions. Even if your business is only part-time or something you do on the side, contributing to a SEP-IRA or SIMPLE IRA can enable you to reduce your current tax load while increasing your retirement savings. With a SEP-IRA, you generally can contribute up to 20% of your self-employment earnings, with a maximum contribution of $54,000 for 2017. A SIMPLE IRA, on the other hand, allows you to set aside up to $12,500 for 2017 plus an employer match that could potentially be the same amount. In addition, if you will be age 50 or older as of year-end, you can contribute an additional $3,000 to a SIMPLE IRA.

 

Don't Overlook Estate Planning - Currently, the unified federal gift and estate tax exemption for 2017 is a historically generous $5.49 million, and the federal estate tax rate is a historically reasonable 40%. While President Trump has proposed a repeal of the federal estate tax, we will believe it when we see it. In any case, your estate plan may need updating to reflect the current estate and gift tax rules, whatever they turn out to be. Also, you may need to make some changes for reasons that have nothing to do with taxes.

 

Conclusion

 

As we said at the beginning, this letter is to get you started thinking about tax planning moves for the rest of this year. Even with uncertainty about this year's tax rates and rules, there are things you can do to improve your situation. Please don't hesitate to contact us if you want more details or would like to schedule a tax planning strategy session.

 

Contact us with any questions are (401) 941-0202 or toll free (outside RI) 888.286.2918.

 

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Contact Us With Questions

401.941.0202 or toll free (outside RI) 888.286.2918

 

Steven D. Gouveia, CPA, ext 203     

Richard M. Chouinard, CPA , ext 202     

Brian S. Clavet, CPA, ext 205   

Rebecca L. Slaoui, ext 208          

Brittanie A. Rotondo, ext 206          

Donna L. Langevin, ext 201          

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Remember, when you can't afford to make a mistake, good advice is priceless.

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