As reported by Reuters, the U.S. Congress may be headed for a reckoning with the federal debt limit sooner than expected, thanks to wealthy Americans and corporations deferring tax payments in the hope that they would benefit from the lower tax rates promised by President Trump. This article examines the tax revenues received this year and a number of ways that taxpayers anticipating a tax cut might defer income to next year.
Effect of anticipated tax cuts on budget. 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, wealth managers told Reuters.
“Everyone wants to talk about deferring income”, said Mark Copeland, senior partner at Signature Estate & Investment Advisors LLC in Newport Beach, California.
The U.S. stock market has also rallied since Trump’s election victory in November, partly on hopes for lower corporate tax rates.
“We are starting to prepare clients for potentially lower taxes in 2018”, said Julia Carlson, chief executive and at Financial Freedom Wealth Management Group LLC in Oregon.
Trump promised to cut taxes as far back as September 2015 in a 4-page plan and reiterated those promises in a 2-page “Contract with the American Voter” before last November’s election and again in a 1-page document in April (see Weekly Alert ¶ 7 05/25/2017), but Republicans in Congress remain divided on tax reform.
RIA observation: The Trump tax plan called for reducing the seven existing individual tax rates to three—10%, 25%, and 35%—but doesn’t provide the income levels at which these rates would apply.
The delay to tax payments could help to 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 monthly report on Wednesday.
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 about $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 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 can’t 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).
