The Investment Scientist

Year End Tax Strategies for a Trump Presidency

Posted on: December 19, 2016

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With the election of a Republican president and a Republican Congress, the tax Wheel of Fortune is spinning again. Since it’s December 2016, you will have to make an educated guess and place your bet now before the wheel comes to a stop.

Tax cuts are  very likely, as is a cap on deductions. According to President-elect Trump’s tax proposal, the seven tax brackets will be reduced to three, the top marginal rate will be reduced from 39.6% to 33%, and the 3.8% Obamacare surtax on investment will be repealed. However, itemized deductions that include mortgage interest and charitable donations will be capped at $200k for joint filers.

If you make a few smart moves now, you can potentially save big.

  • Delay recognition of incomes and accelerate recognition of expenses/deductions.
  • Maximize retirement savings
  • Take capital losses.
  • Front load your charitable contributions

You can use a donor advised fund to front load your charitable contributions. Take my situation,for example. I typically give about $3000 a year to charities. I now have a donor advised fund called The Investment Scientist Charitable Fund into which I put $10,000 worth of appreciated stocks this year, enough money to fund my giving for the next three years. Do you know how much I save in tax? Here is my calculation:

  1. The appreciated stocks have $6000 in gains. Since I don’t have to pay capital gain taxes, I save $6000 * 23.8% = $1428.
  2. The full amount of $10,000 is tax deductible. Since my federal, state and local combined marginal tax rate is 39.6%+5.75%+3.2% = 48.55%, I save $10000 * 48.55% = $4855.

My total tax savings this year is $6283! Not a trivial amount. When the proposed Trump tax cut goes into effect, your tax savings from charitable donations will be less, therefore you will want to front load your contributions now.

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Author

Michael Zhuang is principal of MZ Capital, a fee-only independent advisory firm based in Washington, DC. He is also a regular contributor to Morningstar Advisor and Physicians Practice. To explore a long-term wealth advisory relationship, schedule a discovery meeting (phone call) with him.



You may also get his monthly newsletter, or join his Facebook page for regular wealth management insights. Michael's email is info[at]mzcap.com.

Twitter: @mzhuang

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