By Jeff Albrecht, CPA, CSEP
Taxes are a part of everyone’s life and tax planning is something to take seriously. Planning usually involves some crystal-ball work and an election year makes that particularly challenging.
We have seen some major changes under the Trump administration. He promises more if re-elected. Biden has some major tax proposals, as well. The election result will determine the advice and recommendations from the experts.
And remember this: In August of 1993, new president Clinton signed into law higher tax rates for estates and upper-income earners. The new rates were applied retroactive to January 1, 1993. So, it is possible new law will impact the 2021 tax year, regardless of when signed into law.
How in the heck do you plan in this environment?
Start by knowing the proposals and consider how they may impact you and your client. Consult with those experienced in the tax area if that is not your practice concentration. Understand how your client is structured, whether a corporation, trust, partnership or LLC.
Proposals from the candidates
Trump pushed through some major tax changes, most notably the lowering of tax rates across the board. The top rate went from 39.6 percent to 37 percent. The standard deduction was increased, substantially simplifying tax filing for many Americans. The child tax credit was increased to $2,000. The estate tax exemption was increased to $11,580,000 for 2020.
All of these changes are scheduled to revert back to the previous levels after 2025. Trump proposes to:
- Make the changes permanent,
- Reduce the capital gains rate,
- Enact a capital gains tax “holiday,” and
- Enact a 10-percent middle-class tax cut, reducing the 22 percent marginal tax rate to 15 percent.
Biden proposes to revert back to the old tax rate levels, as well as make some unprecedented changes, including:
- Raise the child care credit for daycare expenses to $8,000 for one child and $16,000 for two or more, with a phase-out of the credit for couples making more than $125,000.
- Enact a $5,000 credit for caregivers.
- Enact a refundable, $15,000 tax credit for first-time home buyers.
- Exclude forgiven student debt from taxable income.
- Enact a renter’s tax credit.
- Raise the top tax rate back to 39.6 percent for income over $400,000.
- Expand the 12.4 percent social security tax on earnings over $400,000.
- Raise the tax rate on capital gains and qualifying dividends to 39.6 percent for those with income over $1 million.
- Limit the tax benefit from itemized deductions for those with income over $400,000.
- Eliminate the stepped-up basis on transfers of appreciated property at death.
- Reduce the estate tax exemption to $3.5 million. (Some say $6 million.)
- Eliminate the ability to exchange real estate using the tax deferred section 1031 exchange.
- Increase the tax on corporate income from the flat 21 percent to a flat 28 percent.
Planning for 2020 and beyond
If new and higher taxes are on the horizon, a few things you and your client may consider:
Accelerate income into 2020.
- Aggressively collect on receivables in 2020.
- Delay the payment of business expenses until 2021.
- Consider converting your regular IRA into a ROTH IRA.
- Harvest capital gains to pay the 15-20 percent rate versus the 39.6 percent rate.
- Exercise non-qualified stock options.
- Consider accelerating charitable gifts, perhaps by using a donor advised fund that will allow you to deduct the gift when assets or cash are transferred to the fund, yet sprinkle the gift to the charities of your choice over time. Save even more tax dollars by using stock that has appreciated in value to fund the gift.
Social security planning
- An S corporation is often used to avoid both the double taxation of a regular corporation as well as minimize the income subject to the Social Security or self-employment tax. Careful planning is required and there are no guarantees this planning opportunity will not be closed with new legislation.
Estate tax planning: The proposed changes are “significant and a fundamental shift in the taxation of wealthy individuals” [Keebler & Associates, LLP]
- For those wealthy enough, give away the full $11+ million before year end. If the exemption is later reduced, there is no claw back for gifts already made. It’s a “use it or lose it” opportunity.
- Continue making annual gifts of $15,000 to children and grandchildren.
- Medical gifts and tuition gifts do not count against your lifetime exemption or the annual exclusion. Pay the provider directly for medical and education bills for your family.
A recent article in Bloomberg Law News, in an interview with UBS Group AG stated, “…the almost $4 trillion that Biden’s tax regime would raise [over 10 years] is much less than the new federal spending – estimated by the Wall Street Journal at $7 trillion-plus – he’s proposed in the next 10 years.”
The article goes on to suggest the economic stimulus from this extra spending will profit those most impacted by the tax changes and would make up for the higher taxes they will have to pay – an interesting spin to the tax debate.
Gather the financial information for yourself and your clients to determine what tax strategies to consider. Being prepared to move fast after the election may be the best strategy.
Jeff Albrecht is the managing partner at Sol Schwartz & Associates, which is celebrating the firm’s 40th anniversary in 2020. He has been a certified public accountant since 1980 and is involved in all areas the firm’s tax practice, including individuals, corporations and partnerships. His client roster includes restaurants, wildlife management, ranching, legal and medical practices and all areas of real estate. He also has worked extensively in trust income taxation, asset protection, succession and estate planning, like-kind exchanges, entity planning, business sales and acquisitions, depreciation analysis, gift planning and charitable foundations. Jeff Albrecht may be reached at 210.384.8000 ext. 113, or firstname.lastname@example.org.