Tax Planning should take place “In Advance” every year if it is proper planning. Despite all that is going on with the future presidency at the moment, it would be prudent to listen to what has been said about future tax plans and if there is anything that we should plan for now, before the end of 2020.
I might suggest that you take the information below, and have a discussion with your Tax Advisor to see what your options are and if you should take any actions in the next 5 weeks.
This article was written by Jeffrey Levine, CPA/PFS, CFP®, CWS®, MSA is the Director of Advisor Education for Kitces.com
For the purposes of information for my clients, I have posted it here as written. If this is not for you, feel free to skip this article, but I would rather that everyone is informed. This is an executive summary of his in-depth article which you can find at Kitces.com if you feel so inclined.
EXECUTIVE SUMMARY
The November 3, 2020 elections produced a wholly unsatisfying result for financial advisors and their clients from a financial planning perspective, regardless of their political affiliation. The political clarity – leading to planning clarity – that many had hoped for, did not emerge. Instead, control of the US Senate, which will determine whether Democrats can drive their legislative agenda or if Republicans will have a ‘check’ over a Democratic-controlled White House and House of Representatives that could lead to gridlock instead, continues to hang in the balance.
The problem? The control-determining Senate races won’t be decided until a Georgia run-off on January 5th of 2021… which is too late to take most actions that influence a client’s 2020 tax bill! Thus, planners are left with a substantial dilemma: act now and make potential changes that could be costly and/or unwanted if substantial changes to the tax code are not implemented for 2021, or wait and risk the chance that such changes may be implemented, potentially dramatically increasing costs.
Given President-elect Biden’s proposal to increase the ordinary income tax rate for those making more than $400,000 per year, and to make the long-term capital gains rate equal to the ordinary income tax rate for income in excess of $1 million, many taxpayers and planners have considered the possibility of accelerating income for high earners into 2020. Problematically, clients who are just slightly above the threshold may actually have the most to lose with potential tax bracket changes, but also the most adverse impact if they accelerate significant amounts of income but no changes occur… while those significantly above the threshold have less potential benefit for accelerating income, but if they’re already in the top tax bracket, there’s limited downside to accelerating income even if tax brackets aren’t changed (and still some benefit if the Biden tax plan is implemented).
With respect to a change in the top long-term capital gains rate, if one is to believe that the Biden-platform income figure of $1 million is ‘real’, the decision of whether to sell or hold positions with existing gains is more nuanced. On one hand, the cost of selling such investments in 2020 (i.e., harvesting capital gains in the current tax year before the increase) would trigger a 20% long-term capital gains tax that might be a tough pill to swallow. But should the Biden proposal become law, it would nearly double the current top long-term capital gains rate from 20% to 39.6%! Which means those with very high income or especially sizable capital gains may still want to take some chips off the table with year-end capital gains harvesting, if only as a form of “tax insurance” to hedge against the risk of potentially dramatic increases in long-term capital gains rates next year.
But, as if that decision wasn’t complicated enough on its own, further complexity is added to the mix when considering the additional Biden tax proposal calling for the elimination of the step-up in basis of capital assets upon death. Ironically, holding appreciated assets until death would rapidly switch from a very desirable tax strategy to an especially undesirable one (because taxing all appreciated investments at death, all at once, would be even more likely to push capital gains into the new higher capital gains rate!).
As the end of the year approaches, clients must also make decisions with respect to expenses that may qualify for itemized deductions. As while in general, a potential tax increase next year means there is a benefit to accelerate income (into 2020’s lower tax rates) and defer deductions (when they’d be more valuable at 2021’s higher tax rates), in practice most high-income taxpayers who already itemize deductions will benefit more by claiming their deductions in 2020 at current rates, due to the potential of the Biden-proposed cap of 28% on the value of itemized deductions! Meanwhile, clients of all income levels should still defer any expenses that won’t be counted as an itemized deduction in 2020 (such as SALT expenses in excess of $10,000, or any potential itemized deductions if the taxpayer’s standard deduction will still exceed their itemized deductions), but at least have the chance of helping boost deductions in 2021 if the rules are changed.
Finally, while the overwhelming majority of taxpayers won’t have to worry about estate and gift taxes whether the exemption remains at its current level, or is dropped back down to its pre-TCJA level as called for by the Biden proposal, advisors must address the ‘lucky’ few clients who do still face Federal estate tax exposure. Though obstacles loom large, for clients who have a net worth that will almost certainly subject their estate to an estate tax liability upon their passing (or may grow to that point in the future), there is a strong impetus to act now and engage in potentially substantial year-end gifting – up to their entire $11.58 million Federal estate tax exemption amount, to ensure they do not lose out on maximizing the current exemption while it lasts.
Ultimately, the key point is that now that the election has passed, clients are looking for guidance as to what they should be doing – or not doing – before the end of 2020 and beyond. And while in many cases, the ‘right’ answer may not be able to be definitively known today, not having a conversation about it at all is decidedly the wrong ‘move’ for proactive advisors seeking to reassure and inform clients.
Let’s Talk
Please feel free to contact me if you would like to discuss how we can help you with your family’s plan either in person, over the phone, or on Zoom
About Dave
Dave Coen is a Retirement Income Certified Professional RICP® and Financial Advisor with SageView Advisory and the CEO of College Planning America. Along with his retirement financial industry experience, he is a College Planning Specialist. He works closely with individuals and families to provide comprehensive financial planning that addresses all elements of their financial picture. Learn more by connecting with Dave on LinkedIn.
SageView Advisory – 4000 MacArthur Blv, Suite 1050, Newport Beach, CA 92660 Tel: 714-813-1703
SageView Advisory Group, LLC is a Registered Investment Adviser. This message is for informational purposes only and is not a solicitation to invest. Advisory services are only offered to clients or prospective clients where SageView Advisory Group, LLC and its representatives are properly licensed or exempt from licensure. Past performance is no guarantee of future results. No advice may be rendered by SageView Advisory Group, LLC unless a client service agreement is in place. CA insurance license #0G82578GET YOUR FREE COLLEGE MONEY REPORT HERE
Apply for a College Planning America Scholarship