President Trump promised tax cuts during his election campaign last year and has reiterated those promises in recent months leading some wealthy Americans and businesses to shift accounting for income into the future, betting that lower tax rates will arrive, perhaps in 2018. Due to the expected tax cut, which may come soon, most high-net-worth individuals want to defer their income. The U.S. stock market has also rallied since Trump’s election victory in November, partly on hopes for lower corporate tax rates.
The delay of tax payments could help explain why tax receipts this fiscal year are coming in more slowly than projected, said tax experts and the Congressional Budget Office (CBO). “Taxpayers may have shifted more income than projected…to later years, expecting legislation to reduce tax rates to be enacted this year,” the CBO said in a recent monthly report.
The weaker tax revenues this year have forced the U.S. Treasury to borrow more money than expected to cover the federal budget deficit, and that is putting the government on track to hit its legal debt limit sooner than expected, experts said. The U.S. government has a legal limit on how much it can borrow, currently set at approximately $19.8 trillion, and the limit can only be increased by a vote of Congress. Since mid-March, the U.S. Treasury has been using emergency funding powers to postpone hitting the debt limit, and those measures had been expected to last until about October, but lower tax receipts so far this year may mean the debt limit will be hit sooner than expected. Treasury Secretary Steven Mnuchin urged Congress last month to raise the debt ceiling before lawmakers break for a long August summer recess, a call echoed last week by House Democratic leader Nancy Pelosi.
Opportunities for deferral? Those who are betting on lower rates might consider some of the following ways to defer income into 2018 or beyond:
- Defer a traditional IRA-to-Roth IRA conversion until 2018. Such a conversion generally is subject to tax as if it were distributed from the traditional IRA or qualified plan and not recontributed to another IRA.
- Defer property sales that would generate a large investment gain (assuming the sale price would likely stay more or less the same); or, if the sale cannot be postponed, structure the deal as an installment sale. (Although the capital gain tax would stay in place under Trump’s plan, the 3.8% net investment income tax would be eliminated.)
- An employee who typically receives a year-end bonus can request that his or her employer delay payment of the bonus until early 2018.
- Consider selling property at a loss in 2017 instead of 2018 (assuming your income will likely stay more or less the same).
- Accelerate deductions into 2017 (again, assuming your income will likely stay more or less the same).
For more information about this article, please contact our tax professionals at taxalerts@windes.com or toll free at 844.4WINDES (844.494.6337).