Bottom Line Inc

Do This Before a Trump Tax Law Changes the System


If President Donald Trump’s ­proposals to overhaul the federal tax system become law, the rules for individual taxpayers will change dramatically in 2018, affecting your income tax rate, deductions, estate planning and investments. And even though it was unclear as of press time how many of the proposals (if any) would make their way through Congress and in what form, there are actions you could take this year in case certain important tax rules change…


Although Trump’s plan would not eliminate the deduction for charitable giving for people who itemize deductions, there would be less incentive to itemize deductions at all. That’s because there would be greater incentive to use the standard deduction, which would roughly double to around $12,600 for single filers and $24,000 for married couples filing jointly.

Also, the Trump plan would eliminate deductions for many expenses, including medical costs and state and local taxes, further discouraging ­taxpayers from itemizing.

What to do: As the tax proposals move along in Congress, if it becomes clear that itemizing will be less attractive next year, it might make sense for some taxpayers who contribute to charity to accelerate more of that charitable giving into 2017 and include it in itemizing deductions for this year…but take a standard deduction for 2018. Otherwise, you would end up with less of a total tax break for the two years.

Also, if you are in a high tax ­bracket (28% or higher), consider shifting charitable giving to 2017 if you expect to itemize in both years but are likely to be in a lower tax bracket next year (see below) under the Trump plan, making the tax break less valuable.


Trump’s plan would reduce the number of income tax brackets. The current seven marginal rates (10%, 15%, 25%, 28%, 33%, 35% and 39.6%) would drop to just three (10%, 25% and 35%).

The exact income ranges for each of those brackets was not specified as of press time, but it appeared that many upper-middle- and high-income earners would see their tax rates decline. For those ­individuals, it might make sense to postpone receiving some income until next year when the tax bite on that income would be smaller.

What to do: Ask your employer to delay paying any end-of-year bonus ­until January. If you are an independent contractor, delay sending some bills until after New Year’s. If you plan to sell your business, put that off until next year. (The sale of some business assets is considered a capital gain or loss, but other assets may generate ­ordinary income or loss and be subject to income tax.) If you are a retiree planning to take more than the required minimum distribution (RMD) from a retirement account such as an IRA, consider waiting until January or later to take any excess beyond this year’s requirement.

Also, consider holding off on a sale of stock you own if you are subject to the 3.8% surtax on net investment income, which applies to individuals with income levels above threshold amounts. (These amounts can be found by searching online for “IRS questions and answers on the net investment ­income tax.”) Trump has proposed dropping the surtax.

Note: Certain taxpayers such as those in the upper half of the 33% tax bracket actually might see their tax rates rise under the Trump plan. In that case, you would want to take the opposite approach and maximize your income in 2017.


Trump wants to eliminate the federal tax on estates, which is currently 40% on amounts above $5.49 million (and twice that exemption cutoff for couples). But to help offset the loss of federal revenue from such a move, Congress also might eliminate the heir-friendly current provision that allows for a “step-up in basis” on inherited assets.

How it works now: Under current rules, the original value of an asset in an estate—whether it is stock shares or a house or another form of asset—gets reset to its value on the date of death for the purpose of calculating the capital gains tax when it is sold. When the asset is sold, that “step-up in basis” results in a lower capital gains tax for assets that appreciated before the date of death.

Example: If stock that was bought for $100,000 is worth $300,000 when the owner dies, and it is sold for that amount, the cost basis is considered to be $300,000, not the $100,000 purchase price, and there would be no capital gains tax even though the asset had appreciated $200,000 since the purchase.

What to do: If the rule for a step-up in basis is eliminated, consider selling a highly appreciated investment sooner if it is no longer an attractive holding, rather than planning to leave it to your heirs in anticipation of the step-up in basis.


If individual income tax rates do drop under the Trump plan, the federal tax exemption on interest from municipal bonds (munis) becomes less valuable, reducing the incentive for individuals to invest in munis. And if the corporate tax rate drops to 15% from the current 35%, as Trump has proposed, banks and insurance companies, which account for more than one-quarter of the demand for munis, would likely be less interested in buying or keeping muni bonds because the tax break would be less valuable.

All that could trigger declines in muni bond prices as investors seek higher yields.

Exceptions: Munis that generate interest currently subject to the alternative minimum tax (AMT) could become more attractive if the AMT is eliminated, as Trump has proposed. (The AMT is designed to limit how much tax taxpayers can avoid through deductions, exemptions and other tax breaks.) And some individuals living in high-tax states such as California, New York and New Jersey would have greater incentive to own certain types of municipal bonds whose interest is exempt not only from federal tax but also from state and local tax. Reason: Federal deductions would no longer be allowed for state and local tax payments under Trump’s plan.

What to do: Reevaluate how attractive muni bond yields would be for you under Trump’s proposed tax changes compared with yields on US Treasuries, which are exempt from state and local tax, and on taxable corporate bonds and other investments.

Online resource for comparing yields:

If it makes sense, be prepared to funnel new money into taxable bonds and shift out of municipal bonds and funds as soon as the new tax rates become law. Of course, you’ll need to factor in the tax consequences if you have long-term embedded gains in your muni bond holdings.

Source: Karen C. ­Altfest, PhD, CFP, a principal and executive vice president at Altfest Personal Wealth Management, an investment advisory firm overseeing $1.1 billion, New York City. The company has been included in Barron’s annual list of the top 100 independent financial advisers for the past five years. Date: August 1, 2017 Publication: Bottom Line Personal
Keep Scrolling for related content View Comments