In our recent post titled “Estate Planning and the 2016 Election (December 6, 2016),” we discussed possible estate tax alternatives which have been discussed by the incoming Trump administration. Similarly, it appears very likely that the Trump administration will adopt significant income tax reform.
Although it may be mere speculation, at this time it appears that the income tax system under a Trump administration would contain three brackets; specifically 33%, 25% and 12%. Additionally, there has been speculation of a reduction in the maximum tax rate on long-term capital gains from 20% to approximately 16.5%.
Such potential change in the capital gains tax rate is significant especially since we are very close to the end of the year. With the expected reduction in the maximum tax rate on long-term capital gains, it would be advisable to hold on to such assets and not dispose of them prior to the end of 2016. The logic behind this is simple; it is better to wait until 2017 to sell assets with built-in long-term capital gains in order to utilize the lower tax rate that expected for 2017.
Additionally, the opposite would be true if you are in a position in which your portfolio contains unrealized long-term capital losses. In that case, it may be advisable to sell such assets with built-in losses, since long-term capital losses can be used to offset long-term capital gains already realized during 2016. By selling assets with built-in losses to offset realized gains for 2016, you will have effectively lowered the burden of the higher 20% tax rate currently in effect.
If you are an individual with a portfolio containing capital property, it is extremely important to understand the importance of timing with regard to the sale of such assets. Likewise, we strongly encourage all investors to seek the necessary advice from their tax advisors.