Post-election tax planning considerations

Key takeaways:

  • Due to concerns about the coronavirus pandemic, short-term relief for individuals and businesses, aids to states, and infrastructure spending, it is possible that taxes may not be a top priority.
  • With the probability of a Biden  win and a potentially divided Congress, major tax legislation  will be difficult to pass. Any tax changes would likely be incremental and focused on ideas that satisfy both sides of the aisle.
  • Planning decisions should align with your planning goals, not with changing political proposals. Make sure any strategies offer long-term planning benefits independent of short-term tax impacts.

What this may mean for you:

  • Meet with your tax advisor to project income for this year and next to plan for multiple scenarios.

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In the aftermath of the election, just like any other year, taxpayers should consider tax planning moves to make before year-end.

What we know and don’t know 

At the time of publication, results announced by state election officials indicate that Joe Biden will win the 2020 presidential election; however, there is the likelihood of challenges and recounts of the results. Furthermore, it is still uncertain which party will have a majority in the Senate. At this time, two races, both in Georgia, have not been determined, and are likely to go to a run-off election on January 5, 2021. The Republicans need to win one of those seats for a GOP majority. Should that happen, the Senate would be unlikely to advance significant tax changes proposed by a Democratic administration. If the Georgia run-off results in both races going to the Democrats, intra-party divisions may also be a hurdle to major tax legislation. Therefore, as we approach year-end, planning decisions should focus on achieving your goals, rather than a specific tax law change. In addition, it’s always a good idea to review your plan considering different scenarios and outcomes. 

What to watch for

It will be important to watch what priorities develop over the next several months. It is possible that taxes won’t be at the top of the new Congress’ agenda. Healthcare, short-term relief for individuals and businesses, aid to states and municipalities, and infrastructure spending might all take priority. 

The Biden-Harris campaign platform proposed raising taxes on high-income and wealthy taxpayers to pay for a variety of proposed new or expanded programs. The proposed tax changes are listed later in this piece as a reference guide. During the campaign, Democrats also proposed a number of items that would provide modest tax benefits for low- or middle-income taxpayers. Still, campaign promises are not a reliable indicator of the shape that actual legislation will take.

If economic stimulus is viewed as a key goal, it is possible that policymakers would defer tax increases for a year. It can take a fair amount of time for Congress to develop tax legislation. Even within the majority party, there will be ideological and policy disagreements that have to be worked out. This was evidenced when President Trump was elected in 2016 and Republicans won the majority of House and Senate seats.  Even with the Republican momentum, the tax bill was not signed into law until late December of the president’s first year in office.

Considerations for year-end planning 

Any year-end planning decisions you make should be in line with your wealth planning goals  rather than determined by proposals made in an ever-changing political climate. If you are evaluating a particular strategy, especially if it involves accelerating taxes into 2020, consider the possibility that any particular proposed change may not happen. 

Ensure the strategy offers long-term planning benefits for you independent of the short-term tax impact. Also, remember everyone’s situation is different. Tax planning for someone with an upcoming retirement will look different than planning for someone who may be starting required minimum distributions (RMDs) soon or someone with high earnings for many more years.

Regardless of the likelihood or timing of tax legislation, you should meet with your tax advisor to project income for this year and next. This will allow you to plan for multiple scenarios.  Below are some year-end planning ideas to consider.

  • If you anticipate higher taxes in the future, consider accelerating income  into years when you expect taxes to be lower. This could include strategies like converting part or all of your retirement plan to a Roth IRA, realizing gains sooner rather than later (especially if you have a concentrated position in one stock or have other reasons to reposition your portfolio), or exercising employer-granted stock options. If your income was low this year as a result of the pandemic, you may consider a withdrawal from your traditional IRA.  Taxes may be paid this year or over the next three years. 
  • For those who have experienced portfolio declines, harvesting capital losses now could be valuable.  Any losses that are not fully offset by gains in 2020 could be carried forward into 2021.  This strategy is especially true for individuals who expect capital gains in the future through stock sales, business sales, installment sales, or other capital transactions.
  • Consider deferring expenses into years when you expect taxes to be higher. This could include deferring the use of losses, depreciating business assets over multiple years rather than choosing immediate expensing, or determining the best timing for the use of charitable deductions.  However, if you make substantial charitable contributions you may want to accelerate contributions into 2020 due to favorable changes from the Coronavirus Aid, Relief, and Economic Security (CARES) Act  (applicable only to cash gifts; gifts to donor advised funds and private foundations are not eligible).  
  • Review your wealth transfer plan. If you have reason to be concerned about estate taxes, evaluate strategies to increase or accelerate gifts. Don’t think only in terms of taxes – your own financial comfort and the impact of large gifts on future generations also deserve careful thought. The individual tax and estate tax provisions are scheduled to expire December 31, 2025, so even with no changes to legislation there is a limited window to take advantage of the large exemptions.
  • Business owners especially have unique opportunities:  
    • First, the combination of historically low interest rates prescribed by the IRS that are used for wealth transfer strategies, the temporarily doubled exemption from gift tax, potentially lower business values caused by the coronavirus and valuation discounts for business interests create an opportunity to transfer wealth at a low cost. There most likely will be time to accomplish these goals after 2020 if rates and valuations remain low. 
    • Second, the CARES Act provides an opportunity to carryback losses incurred in 2018, 2019 or 2020 to offset income from the prior 5 years. Generally losses may not be carried back prior to 2018, which is when corporate tax rates decreased.

Have those important conversations

With the ongoing activity in tax legislation, it will be important to communicate throughout the coming weeks with your tax and legal advisors as well as your Wells Fargo relationship manager in order to be prepared to take advantage of whatever opportunities may arise. We welcome the opportunity to work with you to help you achieve your planning goals.

Appendix: Biden tax proposals

The following table includes some of the main proposals that could impact high income or wealthy individuals as well as some tax credits. As noted earlier there are questions as to whether tax legislation will be a focus early in the Biden term, and if it is, what will be the likelihood of passage.  It is also possible that the final version of a bill would look different than what is outlined here.

Capital gains and qualified dividends For taxpayers with incomes above $1 million preferential tax treatment for capital gains and qualified dividends would be eliminated; instead, the top ordinary income rate would apply.
Ordinary income The top ordinary income rate for individuals would increase to 39.6% from 37% for individuals with income over $400,000.
Itemized deductions The value of these deductions would be capped at a benefit rate of 28% for individuals with income over $400,000.
Payroll tax Social Security tax would be applied to earnings for individuals with income over $400,000.
Qualified business income deduction The deduction would be eliminated for individuals with income over $400,000.
Cost basis at death The proposal would end basis “step-up” at death.
Estate tax This is unclear. The Biden campaign website does not make any specific proposal about changing the estate tax exemption. The Biden-Sanders Unity Task Force has recommended returning to “historical norms”. Some observers believe this would mean that a Biden administration would propose returning the estate exemption to 2009 levels (approximately $3,500,000 per person). It is also possible that Congress could simply leave the current law in place, which would cut the existing exemption ($11,700,000 per person for 2021) in half after 2025.
First home A credit of up to $15,000 would be available for a first-time home purchase.
Child care The child care tax credit would increase to $8,000.
Caregivers A credit of $5,000 would be available for caregivers.
Energy efficiency New or expanded tax credits would be available for energy efficient purchases including electric vehicles, residential improvements, and solar investments.
Authors: Lisa Featherngill, Head of Legacy & Wealth Planning, Wealth & Investment Management, Wells Fargo Bank, N.A; Mike Frost, Senior Wealth Planning Strategist, Wealth & Investment Management, Wells Fargo Bank, N.A.