Each year changes occur in our country due to economics (both global and national), tax law revisions and the political environment. Every four years we read and hear about projected effects of an election on tax laws which can change the decision-making process of the tax preparer and the tax payer.
The role of PLANNING in the coming year may ascend to levels not seen in our lifetime. The taxpayer will want to be aware of possible changes to individual tax rates and corporate tax rates which will impact decisions made in choosing the type of corporate entity for business operations, along with choosing the proper legal entity for asset preservation. Tax planning, financial planning and wealth management planning will need to be re-thought and possibly re-tooled by many taxpayers. Will promises become real? How will old laws be changed? The uncertainty of the next year makes proactive planning imperative. Each person should be thinking and preparing to make important decisions over a short-term plan of one to two years, while employing forward-thinking to their long-term plan. The short-term plan must remain flexible while still providing stability, so the long-term plan can be readily adapted to changes which could take place over the next four years.
Some changes put in place by the Obama administration will be reviewed over the next twelve months. Will the changes survive the review or be modified before they have a measurable life?
CURRENT TOPICS OF INTEREST FOR TAX PLANNING
Social Security Wage Base Increase for 2017 - The Social Security Administration recently published the 2017 wage base subject to the social security tax of 6.2%. The increase of $8,700 represents an increase of 7.34%. The tax amount for the employer/employee owner of a business is $1,078.80 which includes the employer matching percentage.
Conversion of ‘C’ Corp to ‘S’ Corp – The decision to convert a corporation from ‘C to S’ or ‘S to C’ is not just a simple matter of measuring the potential tax savings effect. The Tax Court held that the discounted tax flow method is sufficient in valuing the stock of closely held business entities. Now we must consider the effect of transferring an entity on estate taxes and gift taxes. Possible changes in the corporate tax rates will directly affect the future decisions made on the corporate entity election process.
IRS Code section 2704 Valuation Discounts - Valuation discounts on transfers of interest in family entities may be eliminated under proposed Treasury regulations for IRS Code Section 2704. The regulations will be reviewed before the end of 2016 but the adoption of the regulations is expected. A taxpayer should examine possible legal issues which could impede the transfer, before determining the interests to be transferred. The transfer of the entity interest to either family members or a Trust should be completed as soon as possible. The window for planning a transfer of entity interest is small.
IRA Conversions: Traditional to Roth – Converting a traditional IRA to a Roth IRA is not a determination which can be made without properly analyzing and calculating the effects of the transfer, including the needs and the available resources to meet those needs. The taxpayer should consider expected tax rates during retirement years. The classification of retirement income also needs to be considered before the conversion: As Ken Himmler would say; “You must “Calculate, Calculate, Calculate”. The answer to the question of conversion is rarely simple.
The economic impact of the 2016 election will be a process unveiled over time. Planning for the possible effects on tax laws needs to be proactive. The uncertainty of the changes to the existing laws and regulations will require thoughtful analysis and multiple calculations. Planning will become an important function for an individual concerned with wealth preservation, wealth growth and wealth transfer. Each plan will need to include an exit strategy which includes flexible alternatives.