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taxes

3 Tax-Planning Tips to Consider as Donald Trump Gets Down to Work

Before you make big moves with your savings, investing or inheritance plans, take a breath and weigh the likely consequences.

After Donald Trump’s election as our next president, some of my clients and their accountants were swirling with questions – particularly about the future of income taxes. Will tax rates go down in 2017? Should people give away a bunch of money to charities in case itemized deductions are capped going forward?

Whenever tax proposals are in the works, it’s difficult to confidently predict whether a person or couple should adjust their wealth management strategy. It could take lawmakers several months or longer to reach an agreement before we know the tax rules we’ll be working with for at least the next four years. While we wait and watch for any changes, here are three tips I am sharing with clients:

1. Keep saving, or save more, in your retirement accounts.

Under the current Trump plan, the number of tax brackets could be whittled down from seven to three and the top federal tax rate could drop from 39.6% to 33%. If tax rates go down, the benefit to high-income earners of saving money on a pre-tax basis into a 401(k) plan, and the benefit of tax-deferred growth, may not be as great as under 2016’s tax code.

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However, it certainly doesn’t change the power of making the maximum contribution to a retirement savings account. In fact, contributing the maximum amount should be a goal for anyone wanting to retire with a comfortable nest egg. In 2017 the retirement contribution limits to 401(k) plans and IRAs won’t change — those under age 50 can deposit $18,000 into a 401(k) plan and $5,500 into an IRA, and those 50 and up can deposit $24,000 into a 401(k) and $6,500 into an IRA.

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If tax rates go down and high-income earners see a larger take-home paycheck, the best strategy is to sock away the extra pay for the future. Until the ink is dry on any new legislation, don’t adjust your tax withholding or stop making quarterly tax payments.

2. Stock grants? Split the difference.

Executives and senior-level managers holding stock options or other company stock grants want to know if they should take money off the table now or wait to see if lower tax rates kick in later this year.

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“Splitting the difference” is a strategy I’ve used many times because it’s the best of both worlds. If someone needs to exercise stock grants in the next 15 months, they should consider exercising at least 50% of that stock grant in 2017. With the stock market continuing to reach all-time highs, this strategy enables them to take advantage of today’s high stock prices, but leave some gains for the future if tax rates aren’t lowered until 2018.

Exercising 50% of the grant now lets a person use these funds wisely to achieve a financial goal, such as paying down their mortgage. Implementing your financial plan with the stock proceeds should always be the guiding force behind the price and timing of selling a stock.

3. Don’t rush into a big, and possibly irrevocable, decision.

President-elect Trump has proposed to repeal the estate tax. There is also talk of repealing the “step-up in cost basis” rule, particularly for large estates. The step-up in cost basis rule currently allows heirs to pay little to no capital gains taxes if they sell inherited stocks shortly after the benefactor’s death.

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Several potential strategies could be deployed if lawmakers remove the step-up in cost basis on inherited assets. For example, would it make sense for a person who is older or in poor health to sell stocks that have appreciated in price before they pass away, because they would pay the capital gains tax — possibly at a lower rate — rather than their heir? Or should they donate the highly appreciated stocks to charity before they pass away (subject to any limitations on itemized deductions imposed by a new tax law)?

There are pitfalls to either strategy. For example, the stock could continue to be a stellar performer. What if the heir wants to keep the stock for a long time and collect the dividends or donate the stock to charity during their lifetime? These and other possible outcomes should be carefully considered before making an irreversible move.

If the tax laws change, new strategies will evolve for people to avoid, reduce or delay income taxes. Before jumping to take on one of these new strategies, be sure you and your advisers have done proper due diligence. I prefer that my clients not be the first ones to test the IRS’ appetite with a “cutting-edge” idea unless we’re working with an expert in that area. It’s better to wait a year instead of being a trailblazer, and forget about whether you missed out by not acting earlier. For if that cutting-edge idea is not favored by the IRS, the cost and consequences could be huge.

Lisa Brown is a partner and wealth adviser at Brightworth, an Atlanta wealth management firm. She specializes in investment management, executive compensation, and transitioning into retirement.

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About the Author

Lisa Brown, CFP®, CIMA®

Partner and Wealth Advisor, Brightworth

Lisa Brown, CFP®, CIMA®, is author of "Girl Talk, Money Talk, The Smart Girl's Guide to Money After College." She is the Chief Strategy Officer for corporate professionals and executives at wealth management firm Brightworth in Atlanta. Advising busy corporate executives on their finances for nearly 20 years has been her passion inside the office. Outside the office she's an avid runner and supporter of charitable causes focused on homeless children and their families.

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