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Podcast: Post-Election Year-End Tax Planning Discussion

In this podcast, BMT Director of Tax Services Jennifer Marshall offers a post-election tax discussion based on a Biden-Harris administration scenario. Jen does a deep dive into the various tax proposals mentioned during the campaign, at town hall sessions, and campaign rallies. How do the various proposals impact 2020 year-end tax planning? Listen to hear Jen’s analysis.

Links:

  • BMT Year-End Tax Guide (LINK COMING SOON)

Transcript

Introduction:
Welcome to the Bryn Mawr Trust Wealth Management podcast, providing commentary on what’s moving the financial markets, financial planning, and other timely business and monetary topics. Please welcome today’s host, Jennifer Marshall, senior vice president and director of tax services at BMT.

Jennifer Marshall:
Hello and greetings from my family room, where I have been working since the start of COVID-19, and much like the rest of the country, had been patiently awaiting an announcement of the new president-elect. During this time, I have somehow managed to successfully repress the urge to write multiple year-end tax planning strategies to align with all the various possible outcomes in the presidential and Senate races, while I instead discussed these scenarios with colleagues and most importantly reached out to clients to discuss their questions and concerns on the outcome.

And even now, with an official AP announcement, we are still left with more questions than answers. There will be recounts and court cases and of course the wait for states to officially certify their results. It has certainly been an exciting election year with unprecedented turn out at the polls.

But we’re going to proceed with this discussion with Joseph Biden as the President-elect, with a now smaller majority in the House and a likely Republican majority in the Senate, pending the run-off scheduled for Georgia in January. Given this scenario, it now seems less likely that we will see sweeping tax legislation as laid out in the Biden tax proposals, but there will likely be some.
So, what does that mean for 2020 year-end tax planning?

President-elect Biden discussed various tax proposals during his campaign at town hall sessions and campaign rallies. In general, his tax platform revolves around an overhaul to the Tax Cuts and Jobs Act.

Let’s start with where we are right now. President Trump signed the TCJA into law at the end of 2017, which took effect for the 2018 tax year. We are 3 years into the TCJA that implemented changes such as the repeal of miscellaneous itemized deductions, a $10,000 cap on the deduction of real estate, and state and local income taxes, and the elimination of personal exemptions, alongside a hefty increase in the standard deduction and an increase of the child tax credit to $2,000 for children under the age of 17.

The increase in the standard deduction provided those with itemized deductions below the newly increased standard deduction to file a short-form tax return, originally touted as a new tax return that would be “post-card size” and would simplify taxes for millions of taxpayers.

I’m going to review the Biden tax proposals as they were communicated during his campaign and cited during town hall sessions, the debates and campaign rallies. He has not published specific details on the proposals and it’s important to keep in mind that tax legislation is not easily written, passed and signed into law without a long process of additions and concessions dependent upon the majority seats held in the House and the Senate and politicians willing to cross party lines when a supermajority vote is needed.

One of the more common tax promises that Biden campaigned on was that his tax proposal would only increase taxes for people making more than $400,000 a year. It is largely believed, although not confirmed, that the $400,00 threshold references a married couple filing jointly and not an individual.
The major highlights in the Biden tax proposal are an increase on the highest tax bracket from 37% back to 39.6%, the pre-TCJA tax rate on ordinary income, an elimination of the preferred tax rates available on long-term capital gains and qualified dividends, currently capped at 20% but also available at 15%, 10% or even 0% depending on the total of your ordinary income. The Biden proposal would eliminate the preferred lower rates for people with income over $1 million. Presumably, you may be considering selling stock with a low basis prior to a new tax package to ensure the preferred rate.

We know that long-term capital gains realized by 12/31/20 will qualify for these lower rates. What is unknown is whether new tax legislation would be effective in 2021. Although President Trump’s TCJA was signed into law at the end of 2017, it largely applied to tax year 2018. It is not uncommon, however, for tax legislation to be passed before the end of the year that is made effective for when it is signed and even some provisions that are made retroactive to the beginning of the tax year. Passing new tax legislation in the same year a new administration will have to put forth its first budget is a daunting task in the best of political scenarios.

If your primary concern for tax planning is the potential for increased income tax rates, you may want to consider accelerating income into 2020, as opposed to the more often used strategy of delaying income into the next year to postpone the payment of taxes. But let’s face it, the ability to accelerate income isn’t easily achievable for everyone but it’s worthy of review with your tax advisor especially if you anticipate a need for increased cash flow for things such as home renovation or college expenses.

Some of you may be able to exercise options to accelerate income. For anyone with an IRA, you should review whether a conversion to a Roth IRA makes sense. Especially for any of you that will take advantage of skipping your 2020 required minimum distribution that was made possible with the SECURE Act. You aren’t required to convert the entire IRA, but rather you can pick a specific dollar amount that would then be included in your 2020 ordinary taxable income. A word of caution here, as you review potential Roth IRA conversions. Keep an eye on the Medicare premium income brackets. Jumping to a new bracket would cause an increase in the amount you pay for Medicare premiums. In addition, be aware that the previous rule that would allow you to undo a Roth conversion before the filing deadline of your tax return has been eliminated. Once that transfer from your regular IRA to a Roth IRA is completed, you are locked in and will be required to report the amount converted in your taxable income.

Speaking of income, one of the proposals Biden discussed was expanding the social security tax. Currently, the social security tax rate is 12.4% which is split equally between employer and employee or the entire amount if you are self-employed. The social security tax is only applied to amounts up to $137,700. Wages or self-employment income earned after this amount are not taxed. Biden has proposed to have the social security tax kick back in for income exceeding $400,000. Essentially it would create a gap of income that would continue to not be taxed between $137,700 and $400,000. It’s difficult to plan around compensation but some of you may have an opportunity if you have self-employment income that fluctuates.

Relative to year-end tax planning, it’s important to review potential changes to the deductions that are currently available. You may still be able to itemize deductions if those deductions are higher than the standard deduction available, currently at $24,800 for married couples filing jointly. There are strategies available to help you exceed the standard deduction such as bunching your planned charitable contributions for 2020 and future years together. It’s a well-known strategy to accelerate your deductions in a current year to hedge against future tax rate increases. What makes 2020 stand out for purposes of charitable tax planning is the unheard-of availability to deduct up to 100% of your income under the passage of the CARES act, written to provide relief relative to COVID-19.

Without this provision, cash donations would have been subject to a 60% income threshold. You should note however, that the 100% threshold is only available for cash donations and does not apply to contributions of appreciated stock or for contributions made to donor advised funds and private foundations. Charitable deductions that are over any threshold can be carried forward for up to 5 years.

But Jennifer, you might say, what does this have to do with the election? Currently, the amount of itemized deductions is unlimited. The Biden tax proposal would look to eliminate that provision of the TCJA and put the 28% limitation on itemized deductions back on the books. However, his proposal has also been to eliminate the current $10,000 cap on real estate and state and local income taxes.

If you are in a relatively high-income tax rate state such as New York and California, or pay a high amount of real estate taxes, this could provide a boost to your ability to itemize in the coming years under the Biden plan, but again at a possibly limited rate of your income. I have not read any comments regarding the Biden tax proposal that would bring back the eliminated miscellaneous itemized deductions or make changes to the current limits on charitable donations.

Let’s move on to the topic of transfer taxes such as the estate, gift and generation skipping taxes. One of the most common conversations I have with clients at year-end typically revolves around gifting. I would be remiss if I didn’t mention that I often try to remind clients that are gifting to children or grandchildren that have earned income, say from a summer job or part-time job after school, to consider making a gift into a Roth IRA. The tax-free compounding potential for those gifts is much greater with younger beneficiaries.

Turning the discussion to estate taxes, under the current tax law, you and your spouse, if you are married, can make tax-free gifts of up to $15,000 to any individual. These are known as annual exclusion gifts and generally do not require you to file a gift tax return. At a current lifetime exemption amount of $11.7 million against estate taxes, the need for estate tax planning has greatly diminished except for ultra-high net worth individuals. That is not to say that estate planning is not still critical, just that the need for tax planning to take full advantage of the available lifetime exclusion amounts, coupled with the ability to transfer some or all of your available exclusion amount to your spouse has drastically changed the need for estate tax planning. However, under a Biden tax proposal to lower the current $11.7 million exemption down to $3 or $3.5 million, we could see a shift in the other direction. Even without new tax legislation, many of the individual provisions of the TCJA are set to expire at the end of 2025, and the pre-TCJA exemption amount of $5 million would be reinstated.

If your estate exceeds $3-$5 million, you may be considering additional gifts before year-end. The IRS has provided guidance that any lifetime exclusion amounts made that would exceed future exemption limits would be grandfathered. Gifting considerations you are making will only have an impact in this scenario to the extent they exceed either a newly introduced exemption or the $5 million exemption amount set to come back effective with tax year 2026.

Of greater interest has been the proposal to eliminate the step-up provisions at death, whereby the cost basis of your assets is stepped up to their fair market value at your death, avoiding the unrealized capital gains. It’s not entirely clear how this would be enacted, presumably either the taxing of unrealized capital gains at death or a carryover basis provision where your tax basis would carry over to the beneficiary that inherited the asset, whereby they could postpone paying tax on the capital gain until they sold the asset.

In summary, given the recently enacted SECURE and CARE Act tax provisions, in conjunction with the prospect of new tax legislation in 2021, there has never been a better time to reach out to your tax advisor and discuss year-end tax planning for 2020. Bryn Mawr Trust will be publishing a year-end tax planning guide scheduled to be distributed by the end of the November. Once published, it will also be available as a link in the show notes of this podcast.

I look forward to working with our clients to provide the tax services you need specifically for you and your family. At Bryn Mawr Trust our vision is to help connect clients to a life fulfilled. It’s important to us that we understand your values and goals to better align our planning services for you

Closing:
This has been a production of Bryn Mawr Trust. Copyright 2020. Visit us online at BMT dot com forward slash wealth. The views expressed herein are those of Bryn Mawr Trust as of the date recorded and are subject to change without notice. Guest opinions are their own and may differ from those of Bryn Mawr Trust and its affiliates and subsidiaries. This podcast is for informational purposes only and should not be construed as a recommendation for any product or service. BMT Wealth Management provides products and services through Bryn Mawr Bank Corporation and its various affiliates and subsidiaries, which do not provide legal, tax, or accounting advice. Please consult your legal, tax, or accounting advisors to determine how this information may apply to your own situation. Investments and insurance products are not bank deposits, are not FDIC insured, are not backed by any bank or government guarantee, and may lose value. Past performance is no guarantee of future results. Insurance products not available in all states. Any third party trademarks and products or services related thereto mentioned in this podcast are for discussion purposes only. Third party trademarks mentioned in this podcast are not commercially related to or affiliated in any way with BMT products or services. Third party trademarks mentioned in this podcast are not endorsed by BMT in any way. BMT may have agreements in place with third party trademark owners that would render this trademark disclaimer not relevant.