The election came and went on November 3, 2020, and here we are still in a state of uncertainty about who will serve the next term as the President of the United States. The composition of the Senate is also in question which may impact the ability of any legislative action. As we wait for clarity, it’s important to stick to your tried and true year-end wealth planning efforts with an eye toward the possible election results.
Income tax planning
Individual income tax
A general rule of thumb at year end is to minimize the receipt of income in order to defer income tax and maximize expenses to decrease your taxable income for the year. If Biden wins the election, there could be an increase in income tax rates (ordinary income and capital gains) and proposed limitations to various deductions, so it’s important to analyze whether conventional wisdom needs to be reevaluated. It may be better to take income this year (before rates potentially go up) and defer expenses/deductions next year, as deductions are worth more when rates are higher. Your tax advisor can assist you in making realistic projections for your situation.
Tax-loss harvesting is another general year-end strategy—sell a security to “harvest” the gain to be offset by a loss. Remember that short- and long-term losses are netted against short- and long-term gains, respectively. Also, be mindful of the wash sale rule.
Under the Biden proposed plan, for tax filers with incomes over $1 million the long-term capital gains rate will be taxed at 39.6%; the net investment income tax of 3.8% will apply for a total capital gains rate of 43.4%. If you have losses this year and believe that the capital gains rates may go up, you may harvest the gain in 2021 and “save” the loss from 2020 against that future gain. This strategy, of course, runs the risk of not knowing how and when the tax law will change, and that the gain will not be erased between now and 2021 when you harvest it. At the end of the day, it still should be an investment decision.
Maximize tax-advantaged accounts
Tax-advantaged accounts such as employer-sponsored 401(k) plans, 529 education plans, IRAs, and health savings accounts may offer tax deductions upon contributions, tax-free growth of funds while inside the account, and potential tax-free distributions if permitted by the plan and certain requirements are met. Should income tax rates go up under a Biden administration, utilizing these accounts for maximum potential savings may become even more important. Many tax-advantaged accounts have year-end contribution deadlines so it is important to maximize these opportunities before year end.
Carefully timing and planning for your long-term philanthropic goals could be maximized under today’s tax laws, as the charitable deduction is one of the last standing deductions after the 2017 Tax Cuts and Jobs Act. The increase in the standard deduction makes it more important to carefully time charitable gifts over the years to maximize income tax deduction benefits. However, it’s important to consider that if Biden wins the election and tax rates do increase, you may be better off making charitable donations in 2021 so that you can take the deduction when rates may be higher.
It’s also important to consider two provisions that were enacted through the CARES Act that provide additional benefits this year for cash gifts to public charities. For the majority of taxpayers who do not itemize, there is now a $300 above-the-line deduction in addition to the standard deduction, but only for cash gifts to public charities. For itemizers, the usual deduction limit for gifts of cash to public charities—60% of adjusted gross income (AGI)—is increased to 100% of AGI.
Estate tax planning
With the current federal estate, gift, and generation-skipping transfer tax exemption at an all-time high of $11.58 million per person, now may be the time to speak to your tax advisor about whether you’ve taken advantage of the many opportunities this offers for multigenerational wealth transfer. While this exemption is due to sunset on December 31, 2025, a change in the White House could affect the amount. Presidential candidate Biden’s proposed plan does not include any specific details and only states that it should go back to a “historical norm” with reference to 2009 levels, which can mean $1 million in gift tax exemption and $3.5 million in estate tax exemption.
If you utilize the higher exemption before it may change, the IRS has indicated that it will not be “clawed back” in the event a future federal transfer tax exemption amount is lowered. If you don’t have time to execute more complicated strategies that include asset valuations before the end of the year, you may consider funding a trust with cash now, and then using a swap power later to get assets into the trust. Other strategies such as spousal lifetime access trusts or directed trusts may also offer flexibility in the plan to account for future unknowns.
Another gifting consideration is to use your annual gift exclusion, which enables you to make gifts each year of up to $15,000 (or $30,000 for a married couple) in cash or property to an unlimited number of individuals without incurring any gift taxes or reducing your lifetime exemption from gift tax. Many family members and loved ones may be struggling more this year due to the pandemic, so this presents a good opportunity to provide support in a tax-efficient way.
We will provide more information as the election results come in. In the meantime, please contact your advisor to discuss your personal situation.
This article is for informational purposes only and is not intended as an offer or solicitation for the sale of any financial product or service or as a determination that any investment strategy is suitable for a specific investor. Investors should seek financial advice regarding the suitability of any investment strategy based on their objectives, financial situations, and particular needs. This article is not designed or intended to provide financial, tax, legal, accounting, or other professional advice since such advice always requires consideration of individual circumstances. If professional advice is needed, the services of a professional advisor should be sought.
Wilmington Trust is not authorized to and does not provide legal, accounting, or tax advice. Our advice and recommendations provided to you are illustrative only and subject to the opinions and advice of your own attorney, tax advisor, or other professional advisor.
There is no assurance the any investment, financial, or estate planning strategy will be successful. These strategies require consideration for suitability of the individual, business, or investor.
The information in this article has been obtained from sources believed to be reliable, but its accuracy and completeness are not guaranteed.
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