Advisors would be wise to plan on lower tax rates next year.
“There’s a decent chance tax reform will happen [and] then sunset in 2026” under congressional budget rules, said Michael Kitces, the well-known financial planner and blogger, speaking Wednesday at a meeting of the Orange County, Calif., chapter of the FPA.
Kitces expects to see three tax brackets—in the range of 12 percent, 25 percent and 33 percent.
A number of tax proposals floating around Washington are quite similar, he said, also with plans to simplify the tax tables to three brackets.
The bottom line should be lower rates, so “be very careful about accelerating income this year,” Kitces said. “No one is talking about a top bracket of [the current] 39.6 percent. … There’s a very high likelihood rates will come down [and] they will probably keep preferential capital-gains rates near where they are.”
It is possible, however, that revenue losses will be made up by lost deductions, he said. And President-elect Donald Trump’s own plan is a budget buster—$5 trillion to $10 trillion of additional deficit spending over 10 years.
“The real debate is whether a Trump proposition gets passed,” Kitces said. “It’s not immediately a foregone conclusion.”
For advisors, tax strategies should be similar in a post-reform world.
Look to take income and capital gains while clients are in lower brackets before age 70½, when RMDs begin, he said.
Clients can also do just enough partial Roth conversions to fill up the 25 percent income bracket and whittle down traditional IRA balances before age 70½.
With Roth conversions, do more than you think you need, then recharacterize the next year when clients do their taxes to produce the precise amount needed to fill up the 25 percent bracket, Kitces said.