Private Wealth Advisory

2016 Year-End Tax PlanningPost-Election Considerations for Investors

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November’s landmark U.S. elections may affect planning for high-net-worth investors in December 2016 and beyond.Every year it is important to assess your year-end tax situation and implement strategies that could lower your tax bill when you file your return in April. But given the results of November’s landmark elections, in which Donald Trump was elected president and Republicans retained control of both houses of Congress, it is important to think about year-end planning in the context of how tax laws may change in 2017 and beyond.In this paper, we examine President-elect Trump’s proposed tax policies and discuss how they could influence some financial decisions you might consider before the clock runs out on 2016. We also outline several year-end strategies that are less dependent on the political landscape.

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President-elect Trump has proposed a series of tax law changes that, if enacted, could have a major impact on high-net-worth investors.

Overview of Trump Proposals That May Affect High-Net-Worth Investors

On the campaign trail and in the weeks since the election, Trump has outlined several changes to tax laws that could have a significant impact on high-net-worth investors in particular. It is important to keep in mind, however, that his tax proposals are, at this point, just that. They still have to go through the legislative process, and the ultimate outcomes are unpredictable. Congressional Republicans have put forth their own tax plans, and Democrats still have enough votes in the Senate to likely force compromises.

Nonetheless, you will want to familiarize yourself with Trump’s proposals, as they have the potential to become law, in some form or another. While Trump has proposed wide-ranging changes to U.S. tax laws, here is an overview of the changes that would have the greatest impact on high-net-worth investors.

Ordinary income tax rates Currently there are seven tax brackets. Trump has proposed reducing these to three: 12%, 25%, and 33%.1 The following table compares current tax brackets and the income limits within those brackets to those proposed by Trump.

Investment-related taxes Trump’s plan keeps the current three-level rate structure of 0%, 15%, and 20% for long-term capital gains (on assets held longer than a year) and for “qualified” dividends (which generally include dividends paid by a U.S. company or a qualifying foreign company). However, these rates would have new income thresholds. For example, under current tax laws, the 20% rate takes effect at $466,951 of taxable income for married couples filing jointly and $415,051 for single filers, but under the Trump plan, the 20% rate would kick in at taxable income of $225,000 for couples and $112,500 for single filers. It is important to note, though, that Trump’s proposal regarding capital gains varies significantly from the plan that House Republicans proposed in 2014 and have been advocating for since. Trump has also proposed eliminating the 3.8% Medicare surtax, which applies to investment income of taxpayers with a modified adjusted gross income of more than $200,000 for single filers and $250,000 for married couples.2

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Itemized deductions Trump proposes capping the value of itemized deductions at $100,000 for single filers or $200,000 for joint filers.3 Also, under Trump’s plan, personal exemptions are eliminated. Keep in mind, though, that high earners already have their personal exemptions phased out or eliminated, based on their income.

Standard deduction Trump has proposed increasing the standard deduction from $6,300 to $15,000 for single filers and from $12,600 to $30,000 for married couples filing jointly.4

Alternative minimum tax Trump has proposed eliminating the alternative minimum tax (AMT). Generally, most taxpayers subject to the AMT fall within the $200,000 to $500,000 income range.5

Estate and gift taxes Trump has proposed eliminating estate and gift taxes and coupling this with an elimination of the step-up in basis for capital gains on inherited assets.6 The 2016 estate and gift tax laws provide a $5.45 million exemption for individuals, which doubles to $10.9 million when combined with a spouse’s exemption amount.

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Federal Income Tax Brackets - Current vs. Trump Proposal

Single Married, Filing JointlyCurrent Tax Rate

Adjusted Gross IncomeTrump’s Proposal Current Tax Rate

Adjusted Gross Income Trump’s Proposal

10% $0-$9,275 N/A 10%

$0-$18,550 N/A

N/A 12% $0-$37,500 N/A 12%

$0-$75,000

15% $9,276-$37,650 N/A 15%

$18,551 - $75,300 N/A

25% $37,651-$91,150

25% $37,501-$112,500

25% $75,301-$151,900

25%$75,001-$225,000

28%$91,151-$190,150 N/A 28%

$151,901-$231,450 N/A

33% $190,151-$413,350

33%$112,501 and above

33%$231,451-$413,350

33%$225,001 and above

35% $413,351-$415,050 N/A 35%

$413,351-$466,950 N/A

39.6% $415,051 and above N/A 39.6%

$466,951 and above N/A

Year-End Strategies Related to Trump’s Proposals

The possibility of lower tax rates and more restrictive limits on itemized deductions in 2017 looms large for year-end planning in 2016.

Even though any potential changes would not take effect until 2017 at the earliest, they could have a major impact on the year-end strategies that high-net-worth investors employ in 2016. Given the possibility that the top tax rate will be lowered and itemized deductions will be limited, you may want to consider the following year-end strategies in 2016.

Accelerate deductions into 2016 If the top tax rate is indeed lowered in 2017, your itemized deductions may be worth more to you in 2016 than in 2017. Plus, with Trump’s proposed cap on itemized deductions, your ability to claim deductions in 2017 may be significantly limited. Thus, it may make sense for you to claim as many deductions as you can in 2016. Fox example, you may want to consider funding any charitable contributions you were planning to make in 2017 in 2016 instead.

Contribute to a donor-advised fund Donor-advised funds (DAFs) have become increasingly popular over the past decade because of the flexibility and tax benefits these vehicles provide donors. In 2015, contributions to DAFs surpassed $22 billion, representing 8.4% of all individual giving in the United States, according to the National Philanthropic Trust.7 After contributing to a DAF, the donor can wait to determine when and to which organization(s) grants from the DAF are made. Furthermore, donors who contribute appreciated stock to a DAF generally are able to deduct the full market value of the stocks while avoiding paying capital gains taxes. This is especially attractive considering that the current bull market is now close to its eighth year and equity markets are at record highs. Given the possibility of lower tax rates and limitations on itemized deductions in 2017, you may want to contribute to a DAF before the end of this year. Your DAF will allow you to claim the full deduction in 2016, and then decide, in 2017 and future years, which charities will receive grants.

Delay as much income as possible If you think your income tax rate may be lower in 2017, you may want to delay as much income as you can until next year. For example, if you run your own business, you might consider delaying some of your December 2016 billings until January 2017, if possible. If you were considering converting a traditional IRA to a Roth IRA—a move that will require you to pay taxes on your traditional IRA’s earnings and any contributions for which you took a tax deduction—you might also want to wait until the new year.

Avoid “locking yourself in” to estate planning strategies The laws surrounding estate taxes have been in flux for much of the past several decades. Now, with Trump’s proposal to eliminate the estate tax, there is even greater uncertainty. As a result, you may want to avoid creating certain types of trusts or other legal structures that could be impossible or costly to undo if the estate tax laws were to be altered. It is always important to revisit your wealth-transfer strategies regularly to make sure they are aligned with the most current estate and gift tax rules.

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Comparing Trump and House GOP Proposals

President-elect Donald Trump is not the only Republican who has proposed changing tax laws. GOP leadership in the House of Representatives has rolled out a tax blueprint that is directionally similar to Trump’s proposal but includes some key differences. These differences provide insight into what could be on the bargaining table once the legislative process begins. The table below compares some of the key elements of both proposals.

Income Tax Brackets and Rates

Issue Trump Proposal House GOP Blueprint

Ordinary income rates and tax brackets 12%, 25%, and 33% Same as Trump

Net investment income tax (3.8%) Repeal Same as Trump

Long-term capital gains and qualified dividends

Retain current law (20% top rate)

Effective rates of 6%, 12.5%, and 16.5%

Interest income 12%, 25%, and 33% Effective rates of 6%, 12.5%, and 16.5%

Pass-Throughs, Itemized Deductions, and Estate Tax

Issue Trump Proposal House GOP Blueprint

Pass-through income

15% rate available to S corporations and other pass-through entities that want to retain business profits

Large pass-through entities subject to second-level tax on distributions

Top rate of 25% on business income from pass-through entities

Itemized deductions Cap at $100,000 (single) or $200,000 (married)

Eliminate all deductions other than mortgage interest and charitable contributions

Estate tax Repeal, but tax appreciated assets in excess of $10 million Repeal

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There are several year-end strategies that are less dependent on what happens politically next year.

General Year-End Planning Tips

While you may want to consider the previous suggestions as “preemptive” moves in response to potential changes in tax laws, you also may want to think about some “evergreen” year-end tax planning ideas that are less dependent on the political landscape.

Boost contributions to tax-deductible retirement accounts Unless you have a Roth 401(k), your 401(k) contributions are made with pretax dollars, so the more you put in, the lower your taxable income. Ask your employer if you can increase your 401(k) contributions for December. As for your IRA, any contributions you make in 2017 before the tax-filing deadline may be deductible. Keep in mind, though, that only contributions to a traditional IRA (not a Roth IRA) are deductible, and the deductibility phases out at relatively low income levels.

Harvest capital losses Given the long bull market, there is a good chance that if you sold stocks this past year, you recognized some sizable capital gains. Thus, you might want to offset some of these gains by selling other investments that have incurred losses, especially if these investments are no longer essential to your portfolio. If the loss from the sale was greater than your combined long- and short-term capital gains, you can deduct up to $3,000 against other income, including your salary and interest payments. If your losses exceed your capital gains by more than $3,000, you can carry the remaining losses forward to future tax years. Be aware of “wash sale” rules, however, which prevent you from claiming a loss on the sale of an investment if you repurchase the same investment, or a substantially similar one, 30 days before or after the sale.

Contribute appreciated securities to charities If you donate appreciated securities you have held for more than one year to charity, you can deduct the value of the securities, based on their worth when you make the gift. Plus, neither you nor the charity will have to pay capital gains taxes on the donated investments.

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Consider contributing to a 529 plan A 529 plan can be an excellent college-savings vehicle. Contribution limits are high, and all earnings grow free from federal taxes, provided withdrawals are used exclusively for qualified higher education expenses. Some states even allow state income tax deductions for contributions made to that state’s 529 plan. These accounts are also quite flexible; you can change the beneficiary whenever you want, and you can generally use the money for any accredited college or university in the country, regardless of which state’s 529 plan you use. (Be aware, though, that 529 plans can have implications for financial aid.)

Use RMDs for charitable donations Once you turn 70 ½, you must begin taking required minimum distributions (RMDs) from your traditional IRA and in most cases, your 401(k) or similar employer-sponsored plan. You have until December 31 to take your RMDs for 2016; if you miss this deadline, you may face a hefty penalty from the IRS. (However, if you just reached 70 ½ in 2016, you have until April 1, 2017, to take your first RMD.)

Your RMDs, or any withdrawals exceeding your RMDs, are generally fully taxable. But you can potentially lower your tax burden if you distribute your RMD directly to a charitable organization as opposed to having the distribution go to the individual who then contributes it to the charity. Note that there is a $100,000 annual limit per taxpayer.

Remember the annual gift tax exclusion You can give up to $14,000 (or $28,000 per married couple) to as many recipients as you like without incurring any gift taxes or using any of your lifetime gift tax exemption. These gifts can help reduce the size of your taxable estate while transferring wealth to the next generation. Again, it is important to keep in mind that significant changes to estate and gift tax laws could be coming in 2017.

Make direct payments on behalf of your heirs If you give your children, grandchildren, or other loved ones money to help them pay for educational or medical expenses, your gifts will count against your annual $14,000-per-person gift tax exclusion and potentially your lifetime gift tax exemption amount. But if you pay the school, hospital, or other institution directly, your payment is not considered a gift and will avoid the gift and estate tax limits.

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While 2016 may be quickly coming to a close, there is still plenty of time to implement strategies that can create significant tax savings.

Keeping an Eye on Washington

The prospect of major tax law changes in 2017 adds a new element of uncertainty to this year’s decision-making. William Blair will closely monitor the developments in Washington and, as the legislative process surrounding Trump’s proposals comes into focus, we will keep you updated on how any new laws could affect you. In the meantime, please do not hesitate to contact us to discuss what any of the strategies or proposals outlined above may mean for your wealth management goals.

Washington Watch: What to Keep an Eye on in 2017 President-elect Donald Trump and Republicans, who maintained control of both houses of Congress, have proposed a series of tax changes on the campaign trail and since the election.

The proposed changes from Trump’s proposal that could have the biggest impact on high-net-worth investors include:

• Highest marginal income tax rate reduced from 39.6% to 33%

• Income threshold for 20% rate on capital gains lowered to $225,000 for couples and $112,500 for singles

• Value of itemized deductions capped at $100,000 for singles or $200,000 for joint filers

• Medicare surtax on investment income eliminated

• Alternative minimum tax eliminated

• Estate and gift taxes eliminated, as is the step-up in basis for inherited assets

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1 Tax Foundation, “Details and Analysis of the Donald Trump Tax Reform Plan, September 2016,” September 19, 2016. http://taxfoundation.org/article/details-and-analysis-donald-trump-tax-reform-plan-september-2016; and Forbes, “President Trump: What Does It Mean for Your Tax Bill,” November 9, 2016. http://www.forbes.com/sites/anthonynitti/2016/11/09/president-trump-what-does-it-mean-for-your-tax-bill/#178149604b8b

2 Tax Foundation; and The Wall Street Journal, “What to Do Now Before the Tax on Capital Gains is Cut,” November 25, 2016. http://www.wsj.com/articles/what-to-do-now-before-the-tax-on-capital-gains-is-cut-1480087278

3 Tax Foundation4 Tax Foundation; and CBS MoneyWatch, “How Donald Trump’s Tax Plan Could Affect Your 401(k),” November 21, 2016. http://www.cbsnews.com/news/how-donald-trumps-tax-plan-

could-affect-your-1040/ 5 Tax Foundation; and CNBC, “How Advisors Are Preparing Clients for Trump’s Tax Plans,” November 22, 2016. http://www.cnbc.com/2016/11/22/how-advisors-are-preparing-clients-for-

trumps-tax-plans.html 6 Tax Foundation; and CNBC7 National Philanthropic Trust, “2016 Donor-Advised Fund Report.” https://www.nptrust.org/daf-report/

This information has been prepared solely for informational purposes and is not intended to provide or should not be relied upon for accounting, legal, tax, or investment advice. The factual statements herein have been taken from sources we believe to be reliable, but such statements are made without any representation as to accuracy or completeness. Opinions expressed are current opinions as of the date appearing in this material only. These materials are subject to change, completion, or amendment from time to time without notice, and William Blair is not under any obligation to keep you advised of such changes. This document and its contents are proprietary to William Blair & Company, L.L.C., and no part of this document or its subject matter should be reproduced, disseminated, or disclosed without the written consent of William Blair & Company, L.L.C. Any unauthorized use is prohibited. “William Blair” is a registered trademark of William Blair & Company, L.L.C.