Skip to Content
US Videos

Don't Act Radically at Year-End Despite Possible Tax Changes

Baird's Tim Steffen says the Trump administration is likely to seek out changes in the tax code but advises investors to keep a longer-term perspective.

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. What impact could potential tax changes under a Trump administration mean for year-end tax planning? I'm here with Tim Steffen, he is the director of financial planning at Baird, for his take.

Tim, thanks for joining me today.

Tim Steffen: Thanks, Jeremy.

Glaser: So, I know we're going to be somewhat in speculative territory here about what a potential tax code changes under the Trump administration could look like. But can you just give us some of the highlights of what you think kind of the likely changes are in the near term?

Steffen: Sure. I think the broad theme that we've seen coming out of Trump and really the Republican proposals overall have been generally a lowering of the tax rates, a shrinking of the number of brackets, maybe some modifications on the deduction side, limiting deductions. Really, if there's such a thing as simplification of the tax code, that can be a scary term because simplification often leads to more complexity, but I think that's one of the things they are trying to do. Certainly, some corporate reforms as well and then looking at some things on the estate side as well. That's a big one.

Glaser: So, I'm looking toward the end of 2016 thinking, should I do this tax-loss harvesting? How should I think about this? Are there any things that you would recommend, maybe changing of kind of traditional financial planning advice?

Steffen: So, I think, we are kind of--the general rule of thumb when it comes to year-end tax planning is defer income, accelerate deductions. All things being equal, you want to push your income into the future, bring your deductions into this year. If we're looking at an environment where tax rates are going to fall next year, and that seems to be trend right now, I think that strategy plays even more into it. You're going to bring your deductions into this year, get that tax benefit now while you can, especially if your rates are going to be higher this year than they will be next year. Meanwhile, to the extent you can, push income off to next year. A lot of those things are easier said than done for most individuals, but to the extent you've got that flexibility, and there are certain types of people who can and can't do that, I would definitely consider it.

Glaser: What would be some of those strategies on the deduction side to bring those forward?

Steffen: Well, the big one is charitable contributions. That's the obvious one I think. So, if you have some charitable obligations you have for 2017, perhaps you look at making those gifts in 2016. Then beyond that would be things like maybe medical expenses. Medical expenses will be tough because you've got some AGI thresholds you got to get over that not everybody can make, and you're looking at more on the margin type things like get that last dental checkup in, get your new pair of glasses, refill your prescriptions, get a set of contacts. I mean, all those littler things you can maybe do that might create on the margin small tax benefit this year. But charitable is probably the big one. State tax is another one. If you're going to owe state taxes when you file your return in April, maybe look at paying that liability this year.

There are some ripple effect things you got to be careful about, alternative minimum tax being the big one, so you want to look at that as well. But in general, if you can bring some of those expenses into 2016, it might make sense.

Glaser: And then in terms of pushing your income out, what would be some strategies to make that happen?

Steffen: That may be a little tougher. The obvious one there would be on capital gains side. So, if you have a position in your portfolio that you are thinking about selling because it makes sense from an investment standpoint--and by the way, that should be the real driver, not the tax side but the investment side--maybe you push that gain into January a little bit when maybe rates might be a little lower on capital gains. We're not seeing a lot of proposals on lowering gain rates, but it could happen. So, maybe you push that capital gain into next year. Perhaps stock option exercises if you are an executive. If you're a business owner, maybe you wait to do some billings of your customers until January as opposed to doing them now.

Glaser: So, when thinking about when these types of changes could take place, is it something you think is likely to be retroactive to Jan. 1 or is it going to be more of a 2018 type of …?

Steffen: Yeah, it's a good question, and I think most people were assuming that, well, as soon as the Republicans, Trump comes in and Republicans start taking over, we're going to see tax law changes right away. That's just not how it works. I mean, there's a lot of sausagemaking that goes into this and it's going to take a little while. It's certainly possible that anything that happens next year could be retroactive to Jan. 1 of 2017 and we have seen that before. When a first-year president is able to enact a tax law change, it's retroactive to even technically before they were inaugurated. But given the long-term nature of this process, I would expect that it more likely will see something in 2018. So, it might pass a law late '17 with effective date of 2018.

Glaser: Given some of these changes that are coming down the pike though you don't think it's time for radical changes to what you're thinking about tax planning or anything like that?

Steffen: I would not suggest radical changes under any situation just because there's so much uncertainty. We don't know what's going to happen. So, we know general themes of what the Republicans and Trump want to do, but that doesn't mean it's all going to happen that way. So, I'd be careful about doing anything radical. You want to have longer-term perspective on what you're going to do here. Remember that anything you do from a tax standpoint this year will have an equal and opposite effect next year. So, income you bring or you defer to 2017 is income you don't have this year. Deductions you bring into this year are deductions you don't have next year. If you're doing any kind of planning, you need to look at it on a two-year basis and see what is the impact of not only this year but next year of making these changes.

Glaser: Tim, thanks for your thoughts on these potential changes.

Steffen: Thanks, Jeremy.

Glaser: For Morningstar, I'm Jeremy Glaser. Thanks for watching.