2016 ELECTION PERSPECTIVE PREPARING NOW FOR 2017: THE ELECTIONS, TAXES & YOUR FINANCIAL PLAN
CONTENTS INTRODUCTION 4 TAX STRATEGIES 5 RETIREMENT PLANNING 7 CREDIT & LENDING 8 OTHER PLANNING 8 CONSIDERATIONS CLOSING 8
INTRODUCTION We have noted in the past that election years present some distinct planning challenges, and the current election cycle highlights this notion perhaps more than any other election in recent memory. Polls indicate that both candidates have historically high unfavorable ratings and the continued contentiousness between the two sides certainly does not seem to be inspiring much confidence in the voting public. However, behind the vitriol, there are many tax and economic policy proposals being pushed by both candidates, and as you might expect, significant differences abound. Hillary Clinton would increase taxes on high incomes, including a 4% surtax on AGI over $5,000,000 and a minimum 30% rate on all incomes over $1,000,000 (commonly referred to as the Buffet Rule). She would tax carried interest as ordinary income. Capital Gains holding periods would extend to a minimum of 2 years, and the Estate Tax exemption would reduce from $5,450,000 per taxpayer to $3,500,000 per tax payer (with a reduced federal gift tax exemption of $1,000,000) with a top rate of 45%. It also seems she would support some existing initiatives of the Obama administration including the elimination of the basis step-up rule, and limiting or eliminating Grantor Retained Annuity Trusts and Sales to Defective Grantor Trusts. Clinton would look to create a path to citizenship for immigrants, continue/expand upon the Affordable Care Act, increase spending on infrastructure, increase the Federal Minimum Wage, and address the rising cost of college and ballooning student loan debt issue. Donald Trump would reduce the number of tax brackets as well as the top tax rate. He would cap dividend and capital gains rates at 20% and would look to repeal the Estate, Gift, and Alternative Minimum taxes. He would tax carried interest as ordinary income. Trump would take a hard stance on immigration, attempting to significantly reduce the immigrant population. He would repeal the Affordable Care Act, support infrastructure spending, and would leave minimum wage issues in the hands of the States. It is a common belief that the various policy proposals made by presidential candidates are aimed at attracting their party s base and rarely reflect laws that will actually be passed. However, recent history proves that this is not always the case. Ronald Reagan ran in 1980 on a platform focused on individual income tax cuts and after his election, Congress passed the Economic Recovery Tax Act of 1981. George W. Bush proposed further tax relief during his 2000 campaign, and the Economic Growth and Tax Relief Reconciliation Act of 2001 was passed shortly after that. As we alluded to in our 2016 Election Perspective, it is prudent to understand the various policy positions and to stay in tune with the current economic environment. Rest assured that even in the most uncertain times, we at Lenox will continue to ensure your financial objectives stay on track. The information provided herein is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any federal tax penalties. Entities or persons distributing this information are not authorized to give tax or legal advice. Individuals are encouraged to seek specific advice from their personal tax or legal counsel. 3
TAX STRATEGIES INCOME TAX PLANNING It is always a good idea to sit with your tax advisor to review projections for the year and to determine your alternative minimum tax status. Depending on your situation, some strategies to consider include: Making additional property tax or state income tax payments before December 31 Take additional charitable deductions If possible, look to push income to 2017 Tax-Loss Harvesting there could be opportunities to sell out of a down position to book the tax loss. You could repurchase the security after 31 days while owning the index in-between to maintain market exposure PROPOSED ELIMINATION OF VALUATION DISCOUNTS Perhaps the most critical tax topic right now is the recently proposed limitations to discounts on the transfer of interests in closely held family businesses to relatives. Those utilizing strategies such as Family Limited Partnerships have historically been able to take advantage of certain valuation discounts (i.e. lack of control, lack of marketability) to significantly reduce the value of closely held business interests for transfer tax purposes. New regulations proposed in August would severely limit or eliminate these discounts, rendering these strategies useless. A hearing is set for December 1 to review the proposals, which are then subject to a 90-day comment period. Once finalized, it is typically another 30 days or so until the regulations take effect, so we are looking at Q1 or Q2 2017. It may be a bit of an uphill battle to pass 4 these regulations as-is, but should they pass, they would eliminate what has been an immensely valuable planning strategy for many of our clients over the past several years. As the regulations are currently written, they will apply prospectively so any planning done over the next few months will be safe. These structures tend to be complex, and take time to set up, so the time to act is now. CHANGE TO MORTGAGE INTEREST DEDUCTION RULES FOR UNMARRIED COUPLES On August 1, the IRS acquiesced to a ruling made by the Ninth Circuit of the US Court of Appeals which held that the deductibility of mortgage interest ($1,000,000 of acquisition indebtedness + $100,000 of home equity indebtedness) should be applied on a per-taxpayer basis, rather than on a per-residence basis. This means that unmarried couples who each file their own tax returns can each take full advantage of the mortgage interest deductions, thereby doubling the allowable deduction as compared to a married couple. Though this may not have been the intent of Congress when they passed the mortgage interest deduction law, the language left the matter open to interpretation, and the Court ruled based on the language. We may see Congress act to correct this, but for the time being, this is a great opportunity for those that can take advantage. ANNUAL EXCLUSION GIFTS The annual exclusion gifting limit is $14,000 per person in 2017, or $28,000 for married couples should the election be made to split gifts.
Some important items to note: If you pay for an individual s medical or education expense and you write checks directly to the institution, your payment is not considered a gift and there is no limitation on your contributions. Contributions to 529 Plans are considered a gift. If you are actively participating in a 529 Plan, you should be sure to make your 2016 contributions soon to take advantage of the exclusion. If you do intend to make a gift for 2016, we encourage you to do so by December 1. For your gift to be considered complete, the check must by cashed on or before December 31, so it is always a good idea to give the recipient additional time. One idea for parents of children with earned income is to use part of their annual gifting exclusion to fund a Roth IRA for each working child. This strategy helps transfer wealth to the next generation in a tax-efficient manner. For those of you who own life insurance in an irrevocable life insurance trust, keep in mind that premiums paid on these policies are considered gifts and will count against your annual exemption. LIFETIME GIFTS The lifetime gift exemption rose from $5,430,000 in 2015 to $5,450,000 in 2016. For those of you who had used your entire exemption as of December 31, 2015, you can gift an additional $20,000 in 2016 if it meets your goals and objectives. We expect another inflation adjustment for 2017. CHARITABLE CONTRIBUTIONS As always, your charitable contributions must be made before December 31 to be taken as a deduction on this year s return. If you do intend to make gifts, we should consider this in conjunction with a review of your portfolio as you may have highly appreciated stock that could be used for additional tax leverage on your gift. By gifting appreciated securities, you will avoid paying capital gains taxes on those securities if you have held the position for more than a year. This same strategy can also be applied to some other appreciated assets besides just publicly traded securities (i.e. privately held company stock or real estate). While using less liquid assets does add a layer of complexity. the potential capital gains savings can be significant. Regardless of the source of the donation, a way to help facilitate the gift is through the use of a Donor Advised Fund. This strategy allows you to take an up front charitable deduction for the full fair-market value of the assets contributed to the account. You can then send gifts from the fund to your favorite charities over a period of time. While Donor Advised Funds have become much more popular in the last few years, Private Foundations are still a viable option depending on a number of factors. The key benefits of a Donor Advised Fund is that it requires significantly less administration and can be created with a much smaller contribution (typical minimums are $5,000). However, a Private Foundation allows for greater flexibility in how the assets are invested, where grants can be made and how involved your family can be in the administration and mission of the Foundation. Generally, the minimum amount required to make the administration costs of a Foundation worthwhile is $250,000 to $500,000. QUALIFIED CHARITABLE DISTRIBUTIONS For the last few years, taxpayers have had to wait patiently until late December to see if Congress would extend the Qualified Charitable Distribution benefit for another tax year. Thankfully in December 2015, Congress voted to make it permanent. This tax law allows IRA account owners to send distributions directly to the charity and exclude the distributed amounts from taxable income (generally a better deal for taxpayers than an itemized deduction). It can also count against the Required Minimum Distribution. ADVANCED PLANNING & TAX STRATEGIES As noted above, there could be significant pressure to limit or end planning strategies such as Family Limited Partnerships, GRATs, and Intra- Family Loans. For the time being, these strategies remain viable. The 7520 rate, which is used as a basis for GRATs and Intra-Family Loans, has come down to 1.4% for the month of September. This is 80 basis points lower than this time last year. If these strategies are of interest to you, we should take action now. 5
PLANNING IS BRINGING THE FUTURE INTO THE PRESENT SO THAT YOU CAN DO SOMETHING ABOUT IT NOW. - ALAN LAKEIN RETIREMENT PLANNING REQUIRED MINIMUM DISTRIBUTIONS If you are 70½ you must take your Required Minimum Distribution for 2016. If you have several IRA accounts, you may take the distribution from just one, but the distribution must be calculated on the aggregate of your IRA balances. Note that if you are a recent recipient of an Inherited IRA, you must take distributions by December 31 of the year after the year of the original owner s death. RETIREMENT PLAN CONTRIBUTIONS If you have a 401(k) or certain other Deferred Compensation plans, remember to make your allowable 2016 contributions before year-end. While IRA structures such as a Simplified Employee Pension IRA provide additional time to make 2016 contributions beyond December 31, you should speak with your CPA to determine what your 2016 contribution can be. If you have started new businesses and may not have set up a retirement plan, we recommend you sit with your Lenox Team to determine if a plan makes sense, and if so, what type. ROTH 401(K) Many plans are now offering a new option for 401(k) contributions. While you are likely familiar with the traditional, pre-tax salary deferrals, you may also have the options of electing a Roth 401(k). With traditional contributions, the amount is excluded from your income and then grows tax deferred until you make a withdrawal. Assuming the withdrawal is made after age 59½ (to avoid the 10% penalty on early withdrawal), you would pay ordinary income tax on the amount that is withdrawn. With the Roth, you are contributing after-tax money, but both the contribution and all future growth will grow tax-free, and there will be no tax due when the money is withdrawn. To participate, your 401(k) plan must allow for the Roth 401(k) option and many employers have added this feature. The decision to elect the traditional or the Roth 401(k) is complex and is based on a number of factors. Your Lenox Team is available to discuss your personal strategy. NON-DEDUCTIBLE CONTRIBUTIONS Another new concept available in some employer-sponsored retirement plans is to make deferrals beyond the 401(k) contribution limit ($18,000 for 2016). You may be able to make a nondeductible deferral beyond the 401(k) limit up to the defined contribution plan limit ($53,000 for 2016). Recent changes allow non-deductible contributions to be allocated when you separate from your firm and roll the assets to an IRA. As of January 1, 2016, you can differentiate how certain deferrals are allocated to different retirement accounts. For example, if you have $20,000 in pretax deferrals in your 401(k), $50,000 of non-deductible deferrals, and $10,000 of growth on the non-deductible deferrals, you could make a roll over as follows: $30,000 to a Traditional IRA ($20,000 from the 401(k) and $10,000 of growth on the non-deductible portion) and $50,000 to a Roth IRA (from the non-deductible deferral). This strategy allows you to make significant future contributions to a Roth IRA account. 6
CREDIT & LENDING MORTGAGE RATES & REFINANCING When we released our 2015 guide, we noted the likelihood that the Fed would begin a series of rate increases soon. Indeed, we saw the first rate hike in almost 10 years in December of 2015 when the Fed raised its key interest rate by 25 basis points. And that is where it ended. Rates remain near historic lows, so we still encourage you to take action on a refinance you have been putting off or to move from a variable rate loan to a longer-term fixed rate loan with a reasonable rate. CREDIT REPORTS Yearly, you should review your full credit report. For those of you who have not done so already, you should consider signing up for a Credit Monitoring service. Though far from foolproof, it can be a valuable tool in protecting yourself from identity theft. ADDITIONAL PLANNING CONSIDERATIONS PORTFOLIO REVIEW & REBALANCE We encourage you to review your portfolio in detail to ensure your overall asset allocation is appropriate. It is important to consider asset location to maximize tax efficiency. To whatever extent possible, you should own your tax-inefficient asset classes in your IRA, 401(k), and other tax-deferred accounts. HEALTH SAVINGS & FLEXIBLE SPENDING ACCOUNTS Remember to submit all your claims prior to December 31 if you have a Flexible Spending Account, or you risk losing the funds you have saved. While it is not required to submit for reimbursement for Health Savings Accounts, we do encourage you to keep your receipts and records in good order, so they are available when you are ready to submit. FIDUCIARY APPOINTMENT/ BENEFICIARY DESIGNATION REVIEW Year-end is an excellent time to review your fiduciary appointments in your estate planning documents. Are the people you have listed still the people you want to serve in your stead should something happen? Review your beneficiary designations on all accounts that will pass upon your death via these appointments. Beneficiary-driven accounts include: 401(k), 403(b), and 457 Plans Traditional and Roth IRA Accounts Life Insurance Policies Annuity Contracts Deferred Compensation Agreements If you are listed as a Fiduciary in somebody else s estate planning documents, you have a legal responsibility to ensure that the investments, insurance and other assets held in that plan are both performing well and adequate to the goals of the plan. Your Lenox Team can assist you in evaluating your responsibilities. MILESTONE BIRTHDAYS We will all celebrate birthdays in 2017, but for some, an added gift awaits: Age 18 or 21: Depending on your state, this is the age of majority for your children. If they have UTMA accounts, this is the day the assets become theirs. Age 50: You can now make additional catch-up contributions of up to $6,000 in your 401(k), 403(b), and other workplace retirement accounts or up to $1,000 in your Traditional or Roth IRA accounts. Age 59 ½: Early Withdrawal Penalties end for qualified plan withdrawals. Age 62: You become eligible to receive Social Security payments. Age 65: You become eligible for Medicare. Age 70½: Required Minimum Distributions from IRA accounts begin. OFF TO COLLEGE If you are sending any children off to college, we recommend that you speak with your Trust & Estate attorney and see that a Health Care Directive/Proxy and Power of Attorney are drafted for them. Once they reach the age of maturity, their status as adults trumps your status as their parents, and while many colleges include this sort of paperwork in their enrollment packages, we recommend a personalized document drafted by your attorney. IN CLOSING As we near the end of 2016 and begin preparing for 2017, it is important to reflect on the changes you have experienced over the last year. By reviewing your total financial picture now, Lenox Advisors can help ensure you make any crucial money moves before year-end and prepare for 2017 regardless of the election outcome. 7
KEY DATES September 15 October 15 3rd Quarter 2015 Estimated Tax Payment Due Extended individual tax returns due Last chance to re-characterize 2016 Roth IRA conversion December 1 Execute any gifting checks, must be deposited by recipient by December 31 December 31 Last day to make any tax moves for the year 2016 MML Investors Services, LLC does not provide tax or legal services. Securities and investment advisory services offered through qualified registered representatives of MML Investors Services, LLC, Member SIPC (www.sipc.org) 530 Fifth Avenue, 14th Floor, New York, NY 10036, 212-536-6000. Fee based financial planning services are offered through Lenox Advisors, Inc. a registered investment advisory firm, and are not offered or sponsored by MML Investors Services, LLC. Lenox Advisors, Inc. is not a subsidiary or affiliate of MML Investors Services, LLC. Lenox Advisors, Inc. is a wholly owned subsidiary of NFP Corp. NFP Corp. is not a subsidiary or affiliate of MML Investors Services, LLC or its affiliated companies. FP145 CRN201809-204877