By Rob Starr, Big4.com Content Manager
With 2015 soon ending, high-wealth individuals, business owners and entrepreneurs will be reviewing their year-end tax strategies as they look toward the New Year. Deloitte’s 2016 Essential Tax and Wealth Planning Guide provides insight into important trends and potential tax policy changes that could impact individuals’ tax planning. Julia Cloud, national managing partner for private wealth, Deloitte Tax LLP, and Jeff Kummer, director of tax policy, Deloitte Tax LLP, help us understand the bigger takeaways.
Q: What potential tax policy changes are looming as business owners and high-wealth individuals examine their tax strategies?
A: In the near-term, there is uncertainty related to the expired status of numerous tax provisions. Similar to last year, the House and Senate have taken different approaches to addressing dozens of now-expired temporary tax deductions, credits and incentives. A number of charitable giving and other individual tax incentives are included in these provisions, such as tax-free distributions for charitable purposes from individual retirement plans by individuals age 70 ½ and older and special rules for contributions of capital gain real property made for conservation purposes.
We cannot say exactly how the extenders process will unfold during the short remainder of this year, but it would appear the question is less whether Congress will act on extenders and more whether a package would simply temporarily extend the bulk of these provisions again or might attempt to include permanent extensions of certain provisions. There are obstacles that have to be overcome in order for extenders to be addressed this year, including:
• The apparent lack of any progress to date between the chambers in resolving their very different approaches to extenders legislation.
• The desire by many House Republicans to ensure that certain expired tax provisions are not renewed.
• Concerns that acting on a full extenders package that a substantial bloc of House Republicans may not support could make it more difficult for newly minted Speaker Ryan to hold together the sometimes fractious coalitions within the GOP conference.
There is ample bipartisan support to address many of the now-expired extenders so we think the odds substantially favor passage of an extenders package before the end of the year. However, like much in Washington today, what may be possible for policy reasons can be derailed for political reasons, making this an issue where sudden changes in fortune would not be surprising.
On the horizon, the upcoming presidential election in 2016 has already begun to reshape discussions over tax reform with several candidates releasing details of their vision for what a reformed tax system should look like. As the campaign for the White House picks up steam going into next year, there are a number of difficult tax policy choices that the next president and Congress will have to make as they contemplate reshaping our income tax system. Chief among these are:
• The long-standing question of how much revenue should be raised under tax reform (that is, whether reform be revenue neutral, whether it should lose revenue over time but potentially generate economic growth, or whether tax reform should produce more overall revenue).
• Whether tax reform should be used to address income inequality or whether the tax code is already sufficiently progressive and doesn’t need to be made more so.
• The transition rules that would be necessary to prevent tax reform from creating economic shockwaves.
Q: How can individuals plan in today’s legislative environment?
A: Long-term planning is more effective when you develop your own personal view of our economy and the markets, the future of tax rates that you may experience, and federal spending priorities that may influence your financial and retirement needs. A few ways to make personal assessments of the future include:
• Continue to plan with what you know. Make disciplined planning decisions under present law, given that significant tax changes among policymakers have not yet occurred.
• Adopt a view of the future and plan accordingly. The shape of potential tax code changes is likely to become clearer as a tax reform debate plays out in the 2016 presidential elections.
• Be wary of quick answers and simple advice. Before taking actions in response to a potential tax legislation change, you should completely analyze a proposed transaction and alternative outcomes.
• Watch for opportunities and know your risks. Be informed about significant tax and nontax reforms and position your portfolio in a manner consistent with your conclusions about how changes will affect investment opportunities.
Q: Can you speak to how increased globalization could impact individuals’ tax planning?
A: As individuals and families move from place to place for personal, career, or business reasons, information reporting requirements and financial transparency affect more people than ever before. The United States and many other countries have new legislation with the Foreign Account Tax Compliance Act (“FATCA”) and the Common Reporting Standard (“CRS”), which result in global information sharing of taxpayer accounts with local and international jurisdictions.
Taxpayers should understand and address the impact of globalization on their financial planning. They can do this by knowing how being a citizen, green card holder, visitor or investor will impact their tax status and reporting requirements. It’s also important for taxpayers to consider seeking advice before becoming a tax resident of a new jurisdiction to understand how their immigration status will impact them.
Q: What future trends should high-wealth individuals be aware of?
There are a few trends taxpayers should be aware of, when it comes to their tax planning approaches. In addition to globalization, which we discussed previously, individuals should be mindful of social transformation. The US Supreme Court ruling on same-sex marriage, continuation of Obamacare, and the ongoing headlines around immigration reform are a few of the truly transformational changes that are reshaping life in the United States. Both businesses and individuals are already experiencing tax impacts of these changes, and more are coming.
Technological transformation is another trend to keep an eye on. The continued rapid proliferation of mobile devices, cloud computing, and social media may seem unrelated to taxation, but the increasingly digital economy in which we live does impact individuals. The impact of technology on taxpayers is both overt and subtle, including taxpayer identify theft, increased e-filing expectations, online examination activities by IRS agents, and the use of technology to import tax data. There is a complexity and a simplification that technology brings, of which taxpayers should be mindful.
No one has a crystal ball for what the future holds, but with heightened awareness of change forces around you, taxpayers can be more informed and better prepared for the tax decisions they may face in the next year.