With a new presidency come new tax policies – maybe. Let us explain. Regardless of your political affiliation, there is potential tax planning to be done prior to the end of 2020. But therein lies the problem. Which tax policies will actually be in place? Ultimately, control of the senate will determine that, but we will not know which party will have control until the Georgia run-off takes place…next year on January 5th. That certainly complicates year-end tax planning efforts. If the Democrats win both seats to control the senate, there is potential for taxes to increase as soon as the 2021 tax year. If the senate remains in GOP control (wins one seat), tax increases will likely be delayed until 2024 when the Trump tax cuts are set to expire.
What is proposed under the Biden tax policy?
- Ordinary income tax increases for taxpayers with income in excess of $400,000. There is no clear distinction at this time between married couples and single individuals. One possible strategy is to accelerate income into this year. One of the most common ways to accelerate income is via (partial) Roth Conversions of Traditional IRA’s. You pay taxes at your current tax bracket now to provide future tax-free income at retirement when individual income tax rates are likely higher. For business owners, perhaps you have operating losses that could be used to offset the taxes owed in a Roth conversion. Another strategy for business owners is to accelerate billing so that more income is collected in 2020.
- Current capital gains rates are at 20% for individuals earning more than $441,450, or $496,600 for married couples. It is proposed that individuals/couples earning more than $1 million will be increased to 39.6% (the proposed future top ordinary income tax rate!) If you are in the $1 million+ category for income and you know that you will need to sell some assets for some future need, it may make sense to sell in 2020 to enjoy the lower rates.
- Potential elimination of step-up in basis and capital gains at death. Currently, an asset’s cost basis is the value of asset at individual’s date of death, allowing people to pass on highly appreciated assets in a tax-efficient manner. In other words, eliminating the step-up will mean heirs will have to pay gains taxes on the original basis of the assets. Furthermore, death could potentially be determined to be a ‘realization event’, meaning that capital gains taxes must be paid in that tax year instead of over time as heirs sell assets over their lifetimes. This last point seems less likely given undue tax burden it could create, but it is possible. If you are looking to pass on assets to heirs and would like to ease the tax burden for them, there are some tax planning strategies that can be implemented to create liquidity to pay the tax. We have solutions to this problem so if this is an area of concern for you, please reach out to discuss your options.
These are just a few ideas of how you can do some year-end tax planning. If you have any questions with any of these strategies, please feel free to reach out to discuss your planning options. As with any tax-planning decision, it is best to consult your tax advisor on the tax implications before implementing a strategy.