With a Republican president-elect and GOP control remaining in both the House and Senate, there is plenty of talk about significant tax reform.  However, it’s difficult to plan for something that’s uncertain as there are several tax plans being considered in Washington.  In this letter we will focus on tried and true strategies that work and that you can use to your advantage to reduce your taxes.

For the time being, there are still 7 tax brackets for individuals ranging from 10% to 39.6%.  To be successful with your tax planning, you want to be able to cut your tax bill over two years, in this case 2016 and 2017, not just one of those years.  You may benefit from accelerating your deductions into 2016, unless, as discussed later, you are subject to the alternative minimum tax (“AMT”).  On the other hand, if you expect to be in a higher income tax bracket next year, consider accelerating income into 2016 and delaying deductions until 2017.

Investments.   It is important to consider the holding period if you own appreciated securities; you must own them for at least one year and one day to qualify for lower capital gains rates based on your tax bracket as shown in the chart below.

If you have modified adjusted gross income in excess of $250,000 (married filing jointly) or $200,000 (single filers), the net investment income tax will add 3.8% to these capital gains rates.  Of course, if you have capital loss carryforwards from a previous year and you sell appreciated securities, you won’t be taxed at all up to the carryover amount.

Give Shares to your Children.  If you want to help your adult children, give them shares of appreciated securities instead of cash if they are in a lower income tax bracket than you.  If your single child has taxable income of less than $37,650, his or her long-term capital gain tax rate is 0%.  So, instead of selling shares to give cash to your children, give them the shares and let them sell them.  This only works with children who are old enough to be exempt from the “kiddie tax” which generally means they must be 19 or older and out of school, or 24 or older if they are still in school.  You can give up to $14,000 a year ($28,000 if you are married) to an individual and not have to file a gift tax return.

Itemized Deductions.  The phase-out of certain itemized deductions continues to plague higher-income taxpayers by effectively raising their tax rates. For single filers, the threshold amount is $258,250 and for married filers the threshold amount is $309,900.  Deductions for medical expenses, investment interest, casualty and theft losses, and gambling losses are not subject to the limitation.  As to medical expenses, you can deduct them only if the total exceeds 10% of your adjusted gross income unless you are 65 or older, in which case the threshold amount is 7.5% for 2016, but starting next year becomes 10% for everyone.

Bunching Deductions.  This strategy can work for taxpayers whose itemized deductions are close to, but not more than, the standard deduction ($6,300 for singles plus $1,550 for age 65+, $12,600 for couples plus $1,250 for age 65+).  To the extent you can control the timing of your itemized deductions, you could claim the itemized deduction one year and the standard deduction the next, thereby reducing your tax bill over two years.  If you are subject to AMT, however, this strategy will backfire and you will lose the deductions for state and local taxes.

Contributions to Charities.   Contributions of appreciated stock or mutual fund shares allow you to deduct the fair market value of the securities and avoid paying capital gains tax.  On the other hand, if you have securities that have decreased in value, sell them first to secure a tax write-off and donate the proceeds.  If you are over 70 ½, the best approach might be to arrange to have money transferred directly from your IRA to the charity, a so-called Qualified Charitable Distribution (“QCD”).  Congress made this rule permanent last year for up to $100,000 in annual contributions.  The benefit is two-fold: QCDs count toward your annual required minimum distribution and they directly reduce your adjusted gross income, which can lower the impact of the net investment income tax, phase-outs of itemized deductions and personal exemptions, and Medicare part B and D premium surcharges.

Fund Company Retirement Plans and Iras.  Regardless of income tax rates, it is always a good idea to fund your company retirement plan or IRA to get the benefit of tax-deferred growth.  Make sure you are contributing as much as your budget allows, or at least up to the point of getting the full amount of a company match.  Many employers are amending their 401(k) plans to include a Roth savings option, so check with your HR department.  Although you won’t get a current tax deduction, future withdrawals are completely tax-free, subject to certain requirements.

Spousal IRAs.  Generally, individuals who are unemployed are not permitted to contribute to IRAs because they do not have eligible compensation.  However, the employed spouse is allowed to make an IRA contribution on behalf of a non-working spouse if certain conditions are met: you and your spouse must file a joint tax return and the amount of earned income on your tax return must be at least equal to the amount you contribute to your IRAs.  These so-called spousal IRAs are subject to the income limitations show below.

2017 Retirement Plan Limits

• Maximum contributions to company-sponsored 401(k), 403(b) and 457 plans remain unchanged for 2017: $18,000 with a catch-up contribution of $6,000 allowed for individuals 50 and older.
• IRA and Roth IRA contribution limit: remains unchanged at $5,500 plus $1,000 catch-up for age 50+
• IRA deductions phase out for taxpayers over certain income levels:

• Contributions to a Roth IRA are phased out starting at AGI of $118,000 for single taxpayers and $186,000 for married taxpayers filing jointly.

Roth Ira Conversions.  Anyone can convert a traditional IRA to a Roth IRA.  So if you are in a lower income tax bracket now compared to the tax bracket you anticipate being in once you begin taking distributions from your traditional IRA, or if you like the idea of using the Roth IRA as an estate planning vehicle by passing assets on to your heirs income tax free, you may want to consider making a Roth conversion before the end of the year.  A detailed income tax analysis is recommended before any conversion.

Payroll Tax.  After holding at $118,500 for two years, the Social Security wage base will increase to $127,200 in 2017.  The Social Security tax rate paid by employers and employees stays at 6.2%, while the Medicare portion for both stays at 1.45%.  A .9% Medicare payroll tax continues to apply to single filers with modified adjusted gross income in excess of $200,000 and for couples with modified adjusted gross income in excess of $250,000.  If you think your joint income will be subject to this tax, you could ask your employer to increase your federal tax withholding for the remainder of the year.

Health Savings Account (“HSA”).  If you are covered under a qualifying high-deductible health care plan either at work or individually, consider opening and funding an HSA.  Annual contribution limits for 2017 are $3,400 for individual coverage and $6,750 for family coverage, plus catch up contribution for participants who are 55 and older (not age 50 like IRA catch up contributions).  Contributions are tax deductible and, unlike IRAs, there are no income limits.  Earnings in these accounts are tax-free and withdrawals are tax-free if used for qualifying expenses.

Year-end Reminder.  Please keep in mind that if you plan on making gifts to your favorite charity, to a family member or make a contribution to a qualified retirement plan before the end of the year, Schwab needs time to process those requests.  In order to meet Schwab’s deadlines, we generally need to be provided with any gift or contribution requests no later than December 15, 2016.  Thanks for your understanding with this issue.