If you are a high earner, the subject of paying taxes can be a difficult one. Most upper-income taxpayers are looking for ways to reduce their taxes, and 2017 may be a prime opportunity to do exactly that. Why? The incoming presidential administration's tax plan is projected to include several key tax reduction aids for high earners. Here are 5 ways that you can take advantage of that... starting before the end of 2016.
Delay Compensation. One big part of Mr. Trump's proposed tax plan is to reduce the number of tax brackets. The new top tax bracket would be reduced from 39.6% to 33%. If you're earning more than $415,000 annually, you're likely to be in this category. So, the smart move is to try to delay any taxable compensation (such as bonuses, commissions, and taxable benefits) to 2017, where it can be taxed at a lower rate.
Accelerate Deductions. Deductions may be capped at a lower amount than they have been in the past -- which means that in addition to deferring compensation, you may also want to use all available deductions this year to lower your tax bill before the change. You could do this by prepaying next year's property and state taxes, making charitable donations in 2016 rather than 2017, or prepaying deductible school expenses.
Take Capital Gains Losses. Investors should always be aware of how to maximize their capital gains losses to reduce overall income, but it's vital this year. Those losses will be more valuable to high income earners in 2016 -- both because of reduced future tax rates and the probable elimination of things like the Net Investment Income Tax.
Consider Forming an LLC or Partnership. Pass-through entities, which "pass" the income and tax burden directly on to owners' personal income taxes, are likely to see a big reduction in income tax rates. Currently taxed as ordinary income, Limited Liability Company, partnerships, or S-Corporation profits may be subject to a mere 15% income tax rates under Trump's plan. So, if you're a sole proprietor or working as an independent contractor, you should talk with your accountant and attorney to see if it would be wise to convert to an LLC or other pass-through entity.
Stay Alive. It's a given that most people don't want to die, but here's an additional motivation: the estate tax that large estates (over $5,490,000 in 2016) are subject to is on the chopping block as well. Your heirs would likely not face a tax until they sell assets under this new plan.
As always, it's a good idea to consult with an accountant who specializes in tax planning, such as Alexander & Associates CPA, before making large changes to your tax strategy. But, 2017 is likely to be a year in which you have lots of ways to take control of your taxes. So, be sure to educate yourself and take action before it's too late.