What Are Some Potential Tax Implications of a Trump Presidency?

After a long and very divided election cycle, Donald J. Trump is officially the President Elect of the United States. Because there’s still some time before he officially takes office, people from all walks of life have questions about what his term is going to mean for them personally and the United States as a whole.

Since tax services are our area of expertise, we want to contribute to this conversation by looking at the impact Trump’s presidency may have on the taxes of Americans:

 

The President and Taxes

During the election process, Trump talked about taxes a lot. But before we get into any of those specifics, it’s important to note that the Constitution of the United States does not allow the President to change tax rates or set tax policy. Instead, those are actions that must be approved by Congress. And even though Republicans in the House and Senate now have control of both bodies of Congress, that doesn’t automatically mean they’ll see eye to eye with the 45th President.

 

4 Trump Tax Proposals

The first notable proposal that has come from Trump is reducing the current seven income tax brackets to three. As part of this proposal, the standard deduction amount would be more than doubled for both single and joint filers. Itemized deductions would be capped at $100k for single filers and $200k for joint filings. This plan would also eliminate personal exemptions, the alternative minimum tax and head-of-household filing status.

Another notable proposal has to do with child care. This would take the form of adding a deduction for child care equal to the state average cost of child care for children under age thirteen. This deduction would be available for up to four children, including those with stay-at-home parents or grandparents. The proposal also includes a spending rebate on remaining child care expenses for low-income parents, allowing annual tax-deductible contributions into Dependent Care Savings Accounts and a deduction for the cost of elder care.

The two other proposals we want to touch on both have to do with repealing existing policies. The first is repealing the estate tax. Capital gains above $10 million held until death could be taxed, with family farms and small businesses being exempt. Trump has also proposed repealing the Affordable Care Act net investment income tax.

Although there will definitely be changes over the next few years, most of us will continue living our lives by getting up each day and working hard. If you’re a business owner and want to ensure that you maximize the benefits you’re able to reap from your hard work, learn more about why Donohoo Accounting Services truly understands the challenges faced by small business owners.

 

 

Using Retirement Plan Contributions to Reduce Your AGI

AGI stands for adjusted gross income. This number sets the threshold for certain deductions such as medical expenses. It also determines eligibility for tax credits like the retirement savings credit and American opportunity credit. As its name implies, AGI is something that can change based on certain factors. That’s why we want to cover the effect that contributing to your IRA can have on it, along with another aspect of a retirement plan contribution that can reduce tax liability.

 

How Traditional IRA Contributions Adjust Income

When you make a contribution to a traditional IRA, it receives classification as an adjustment to income. The impact this will have on adjusted gross income is reducing it on a dollar-for-dollar basis. So if you make a fully qualified contribution of $3,000, that’s the exact amount your AGI will be reduced.

While that’s the basic overview of how this type of contribution affects AGI, as with many aspects of the tax code, there are some important considerations to take into account. One is how much of a traditional IRA contribution is deductible. For an unmarried individual who isn’t covered by an employer plan like a 401(k), the amount contributed will be fully deductible.

For people who are married, this type of contribution is only guaranteed to be deductible when neither spouse is part of an employer-sponsored retirement plan. If that criteria is met, contributions made will reduce adjusted gross income. It’s worth noting that while contributing to a Roth IRA can be a smart financial decision, this specific contribution won’t reduce AGI due to it involving after-tax dollars.

 

other Important Notes About Contributions and Retirement Plans

Even for people who are single, if they are covered by an employer plan and their AGI exceeds a certain threshold, their traditional IRA contribution won’t be deducted. Another thing to keep in mind about both traditional and Roth IRA contributions is they can qualify you for the retirement savings credit. If you’re eligible for this credit and claim it, you’ll be able to directly reduce your tax liability.

What’s interesting about the retirement savings credit is even though it lowers tax liability, it does not reduce AGI. That’s because it’s classified as a credit and not a deduction. The main criteria for claiming this credit are being over 18, having a modified AGI that falls below a specified level and not being a full-time student.

As this issue demonstrates, optimizing your tax situation can be quite a challenge. If this is something you want to do but are feeling overwhelmed by the number of questions you have, the best way to get answers and guidance is by enlisting the help of our professional tax services.

 

The 179 Expense Deductions Guide for 2016

If you’re a business owner, you don’t need to be an expert about the IRS tax code. Although it’s obviously very important to meet your tax obligations, you can hire an experienced tax professional to assist you. By getting tax assistance and guidance from the right professional, you can stay on top of all your obligations and ensure you don’t miss out on any opportunities to reduce how much you owe.

Section 179 is the perfect example of an option that can help businesses reduce what they owe. While sections of the tax code can seem very complicated or even mysterious, this one is relatively straightforward. The purpose of Section 179 is to give businesses the ability to fully deduct qualified purchases in the year they make them. So instead of needing to spread this deduction out over several years of depreciation, businesses can reap these benefits all at once.

 

Is Section 179 a Loophole?

The answer to that question is no. However, having that association with it is completely understandable. When the US government created this section of the tax code, they did so to incentivize businesses to invest in themselves by purchasing the equipment they need to thrive and grow. Where the “loophole” aspect of Section 179 comes into the picture is there was a time when plenty of businesses used this section of the tax code to write-off the purchase of vehicles which qualified at the time.

Because that specific aspect of Section 179 did start to be viewed as a widespread loophole, the current limits on business vehicles have been significantly reduced from where they were. The good news is the rest of Section 179 is still very useful for small businesses (as well as larger ones).

 

The Deduction Limit, Spending Cap and Bonus Depreciation for 2016

The deduction limit for the twelve months of 2016 is half a million dollars. That deduction applies to both used and new equipment, along with off-the-shelf software. In terms of what qualifies equipment for this deduction, the main criteria the IRS follows is it must be used for business purposes more than 50% of the time.

The other notable aspect of Section 179 for 2016 is the spending cap. The amount for this year is two million dollars. In the event a small (or larger) business manages to exceed that threshold, they can still take advantage of bonus depreciation. This year’s bonus depreciation is set at fifty percent.

 

Are Vehicles Still Eligible?

Yes, there are still some benefits available for business vehicles. The summary is certain passenger vehicles have a total depreciation deduction limitation of $11,060, while other vehicles that by their nature are not likely to be used more than a minimal amount for personal purposes qualify for a full Section 179 deduction. If you have specific questions about this aspect of Section 179 or other business tax issues, contact us for a free consultation.

 

 

5 Tax Planning Tips for 2016-2017

Although we’re officially in the last quarter of 2016, there’s still time to optimize your tax situation. And while there are still a few months left until 2017 arrives, getting a head start on thinking about your future tax planning can pay off big down the line:

 

1. Get Organized

Not only is having organized records crucial in the event you’re ever audited, but having all of your information together is the starting point for being able to save. When your financial information is a mess, things are going to fall through the cracks. By finding the system that works best for you and then sticking to it, you’ll be able to have all the necessary information to take care of your taxes.

 

2.Health Insurance and Child Tax Credit

The penalty this year for not having health insurance is increasing to $695 for adults and $347.50 for children. The total penalty a family can face is $2,085. So not only do you want to ensure all your health insurance information is up to date, but you’ll want to periodically review your policy to ensure you’re getting all the available benefits.

For families who are welcoming a new child, be sure to get a Social Security Number for your new addition so you’ll be able to claim your child tax credit. The maximum credit amounts for 2016 are $3,373 for 1 child, $5,572 for 2 children and $6,269 for 3 children.

 

3. Retirement

If you’re concerned about the amount of taxable income you’re going to have, one of the best ways to address this issue is by contributing more to your retirement plan. Increasing the amount you contribute up to the maximum allowed for your 401(k), 403(b) or Traditional IRA can significantly reduce your tax burden.

 

4. Charitable Contributions

Another option for reducing your tax liability while also helping others is to make charitable contributions. As a general rule of thumb, be sure to properly document all donations. And if you’re planning to make any type of large donation, it’s worth first speaking with a tax professional to ensure it will actually have the effect you’re planning on.

 

5. Going Green

Plenty of people decide to purchase a car during the holiday season. If you’re in this position, you should consider a hybrid. Purchasing that type of vehicle can make you eligible for a tax credit of between $2,500 and $7,500 depending on the vehicle’s battery size.

 

Donohoo Accounting Services has over two decades of experience helping clients with taxes. You can learn about the different tax services we offer, as well as get a free consultation about your tax planning needs by calling 513-528-3982.