Financial Planning Considerations Prior to Election Season
As a continuation of our election season series highlighting potential changes to tax policies in 2021 and beyond, this article provides our perspective of the planning considerations and preemptive actions you may want to consider depending on the election outcomes in 2020.
In comparison, the Trump campaign has not issued a comprehensive tax plan as of this writing. We know from White House comments that President Trump supports making the individual tax cuts in the 2017 Tax Cuts and Jobs Act permanent along with reductions in the corporate tax and capital gains rates. For example, the individual tax cuts, the special tax cut for small pass-through businesses and the larger estate tax exemption are set to expire in 2025.
Planning for Potential Tax Increases in 2021
Several political vectors must align to give effective control over the legislative agenda to Democrats. The two most important are capturing the White House and Senate majority. Most political observers say this could happen. With that in mind, it makes sense to meet with your advisors and begin discussions of the potential impact on your business and personal tax situations. Whenever there is a leadership change in Washington, Congressional tax committees will issue a press release or introduce a bill in January or early February setting an effective date for proposed new tax rules for transactions occurring after that date. The tax-writing committees are very sensitive to a rush of transactions ahead of proposed new taxes.
We realize it is very difficult to make tax and business decisions on incomplete information. However, scheduling planning discussions helps bring these issues into focus and forces planning to prepare for any potential impact to your long-term goals. As we near the election, here are a few considerations to include in your planning discussions with your advisors:
- Accelerate Income and Delay Deductions. Estimate your anticipated taxable income sources for 2021 and whether you may be at or above $400,000 taxable income which is the proposed threshold for higher tax rates on wages and capital gains under Democratic plans. Assessing whether income can be accelerated into 2020 should be considered along with deduction maximization in 2021.
- Appreciated Asset Review. Review appreciated assets and assess whether it makes sense for economic reasons to consider selling after the election in 2020 or early 2021. When making this determination, it may make sense to review whether you are carrying any short or long-term losses on your tax return that can absorb gains that may result from capital gain property sales.
- Review Your Gifting Strategy. Review your estate plan and gifting strategy. Consider whether it makes sense to accelerate gifting plans ahead of 2021 to use the larger unified exemption before potential changes in 2021. Under the current estate and gift tax, an individual can gift $11.58 million per individual and couples can give away up to $23.16 million — over their lifetimes without paying the gift tax of 40%.
Given the uncertainty of the outcome of the upcoming election, combined with the uncertainty posed by the pandemic, we recommend taking advantage of the current estate tax exemption and the valuation discount around closely held businesses, potentially providing business owners with a path to pass more wealth to heirs free of tax. Coordination with state transfer taxation rules should also be considered.
It is important to note that the previous Obama administration introduced regulations that would have disallowed valuation discounts for closely held family businesses. It is possible a return to this proposal could occur under a Biden administration.
Shortly after assuming the presidency, the Trump administration issued an executive order directing the Treasury Department to remove the regulations. It is important to remember that President Trump’s executive order resulted in the regulation being mothballed, not eliminated.
- Corporate Income Management. With a proposal to raise corporate tax rates, consider strategies that maximizing deductions against business income for 2021 to lessen the tax bite of higher corporate rates. Consider whether you can generate deductions from projects in 2021 with an eye toward potential higher corporate tax rates. Also, the CARES Act signed into law on March 27, 2020, allows a five-year carryback of net operating losses generated in taxable years beginning after December 31, 2017, and before January 1, 2021. It may make sense to claim those losses as soon as possible. While we haven’t seen proposals eliminating this provision, it is possible that a new Administration may restrict the benefits of this provision for wealthier companies.
- Roth conversions. If Democrats capture effective control over the tax agenda, consider whether it makes economic and tax sense to convert some of your pre-tax IRA accounts into Roth before tax rates rise. Before undertaking this strategy, it is important to plan for the state and federal tax bill that will accompany a conversion. Roth accounts can help create tax diversity in your portfolio.
- Trust Distributions. Under a 2019 law, IRA distributions to non-spouse beneficiaries can no longer be stretched over the lifespan of a beneficiary to save taxes. Only a narrow group of designated beneficiaries can now stretch IRA distributions over more than 10 years. With the risk of higher tax rates in 2021, it may make sense to consider reviewing beneficiary designations with your tax advisor.
- State and Local Taxes. Your tax and business planning for 2021 should also include the very real possibility that your state and local taxes may rise in 2021 to pay for COVID-19 related expenses and growing deficits.
After Congress considers a fourth economic stimulus package, (and barring a Supreme Court nomination), the politics of the general election will consume Congress and the White House through the election. Keep your eye on the race for the White House and control of the Senate. We will continue to share our perspectives with you. If you have any questions or want to discuss how this may impact you, please do not hesitate to contact your Boston Private representative.
Boston Private is pleased to announce a partnership with Doug Fisher, a Washington Policy expert, who will offer a series of insights into a number of reform proposals making their way through Congress. Doug provides strategic insight into the political and policy developments in Washington which impact the wealth management business. Advising wealth management clients on business, tax, and retirement issues, he helps firms and their clients understand the legislative and regulatory landscape and how to maximize business opportunities.
Doug served as tax counsel to the U.S. Senate Finance Committee and led the development of the Roth IRA, Simple retirement plan, the health savings account, and the 529 college savings plan. He co-authored the Small Business Jobs Protection Act, the Balanced Budget Act of 1997 and the Health Insurance Portability and Accountability Act.
After serving on the Senate Finance Committee, Doug led Fidelity Investments’ federal government relations and public policy teams. During that time, he focused on financial services, tax, retirement, and health care policy impacting Fidelity and its clients.
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The opinions expressed and information contained in any article published in the Vault are given in good faith and considered reliable. However, such opinions and information are subject to change without notice and are provided only as of the date issued. Neither Boston Private nor its affiliates warrant the completeness or accuracy of such information. Any third-party opinion is solely the opinion of its author and does not necessarily reflect the opinion of Boston Private or its affiliates. The materials on this website are for informational purposes only and do not take into account your particular investment objective, financial situation or need. Since each client’s situation is unique, you should consult your financial advisor and/or tax planning professional before acting on any information provided herein.