2016 Tax Letter

From the Desk of Michael T. McCormick

Dear Clients, Friends and Colleagues;

Happy New Year! I hope your 2016 was healthy, happy and prosperous. I can’t believe we are getting ready for another tax year! As I get older, it seems like the tax seasons get shorter and shorter. I am starting my 30th year as a tax attorney and 36th year in the tax field!

Every year in preparation for a new tax season, I scour the tax statistics published by the Government in order to factor audit risk mitigation into my planning. While my clients love reducing their tax hit through an integrated tax strategy, I find it as important to reduce audit risk in all of the returns I prepare. That part of the “McCormick Magic” sometimes goes unnoticed, but it is one of the reasons I have one of the lowest audit exposures among my competition. I like to use the Tax Code as a sword to cut your tax bill, but use the IRS practice, procedure and statistics as a shield to reduce audit risk. In addition to tax planning and preparation, as a tax attorney, I defend numerous audits every year that arise from other return preparers. This continual exposure to the IRS audit machine allows me to take what I learn and incorporate it into my planning so that we take maximum advantage of the Tax Code while actually narrowing your audit profile.

The Tax Code for 2016 is very similar to last year’s code, so I do not anticipate any huge changes from last year. I can’t say the same about 2017. With the new Administration, I anticipate more changes of any year since the current code was enacted in 1986 during the Reagan Administration! During the campaign, President-elect Trump released an outline detailing his plans for his first 100 days in office. Within the “100 day plan presentation,” President-elect Trump listed several tax proposals to immediately work with Congress on enacting:

• The Middle Class Tax Relief and Simplification Act—According to the President-elect, the legislation would provide middle class families with two children a 35-percent tax cut and lower the “business tax rate” from 35 percent to 15 percent. During the campaign, Mr. Trump described the plan as “an economic plan designed to grow the economy 4 percent per year and create at least 25 million new jobs through massive tax reduction and simplification.”

• Affordable Childcare and Eldercare Act—A proposal described by Mr. Trump during the campaign that would allow individuals to deduct childcare and elder care from their taxes, incentivize employers to provide on-site childcare and create tax-free savings accounts for children and elderly dependents.

• Repeal and Replace Obamacare Act—A proposal made by Mr. Trump during the campaign to fully repeal the ACA.

• American Energy & Infrastructure Act—A proposal described by Mr. Trump during the campaign that “leverages public-private partnerships, and private investments through tax incentives, to spur $1 trillion in infrastructure investment over 10 years.”

In a nutshell, what I am hearing from my contacts on the Hill, we can anticipate a consolidation of the tax brackets from the current seven with a top bracket of 39.6% to three brackets starting at 12%, 25% and maxing out at 33%; a significant reduction from the current rates. He is also planning to increase the standard deduction to $15,000 for single taxpayers and $30,000 for married taxpayers. Currently, the standard deduction is $6,350 and $12,700 respectively. Again, pretty good tax savings for those who do not itemize. Another good benefit to taxpayers in the upper income brackets, is his proposal to do away with the insidious Alternative Minimum Tax that is the bane of my existence. The AMT can really increase your tax bill if you are subject to it and it really truncates some of the magic I can do with certain write-offs. Lastly, he proposes the elimination of “Obamacare” which would in turn eliminate the 3.8% surcharge on Net Investment Income. Again, another nice benefit to taxpayers.

On the bad side for taxpayers, is his proposal to cap the amount of itemized deductions that one can take at $100,000 for single taxpayers and $200,000 for married taxpayers. All personal exemptions for spouse and children would be eliminated as would the tax status of “Head of Household”. There are also rumors that he intends to eliminate the itemized deduction for home mortgage interest and the real estate tax deduction. Those deductions have broad bipartisan support, so that may be tough to get through Congress, but as with all of these proposals we will have to wait and see.

As I said, this will be a huge change year on the tax front. I will keep you up to date on any and all changes through my “Friday Tax Tip” blog series on our website. I would also suggest scheduling a tax strategy meeting later this year as we see what comes down from Washington.

As I always say, I have the best clients in the world and it is a real honor to work with you to reduce your tax hit, reduce your audit risk and help your family in any way I can. I have a terrific team ready to jump into the 2016 tax return year. Thank you very much for your business!

Very Truly Yours,

Michael T. McCormick, JD, LL.M.
MCCORMICK TAX GROUP, LLC