Whether you have been glued to your screen during the election process or decided to shut it off and tune it out, the 2020 Presidential election’s outcome affects EVERYTHING. Including your tax plan.
Although Biden is the president-elect, the results of which party controls the Senate won’t be finalized until 2021. History dictates that new presidents are likely to enact their tax proposals early in their presidency if their party controls Congress. This will still be up for grabs until early 2021.
If Congress remains divided between a Democratic House and Republican Senate, President-elect Biden may be challenged in getting his tax plans enacted into law. Investors are betting on that, evidenced by the surging stock market. However, even a Republican Senate may need to face and address the growing federal deficit resulting from the Tax Cuts and Jobs Act and the CARES Act. Pandemic relief is expensive. And, who knows? There may be another round of aid slated to go out in 2021.
For now, it looks like we may maintain a status quo with no significant tax changes on the near horizon. Assuming that individual tax rates may not increase in 2021, taxpayers can focus on the usual strategies such as:
- Postponing 2020 income until 2021
- Accelerating deductions
- Delaying year-end bonuses
With higher standard deduction amounts, a bunching strategy for itemized deductions may be important. This methodology takes the standard deduction every other year, and bunches itemized deductions (like charitable contributions and medical deductions) into the “off” year for the standard deduction. This year may be the year to bunch itemized deductions with higher limits on charitable contributions and a lower 7.5 percent threshold for medical expenses only available for 2020.
Non-itemizers can look to the $300 above-the-line charitable contribution, which is only available in 2020. There are also over 30 regularly expiring provisions currently expiring at the end of 2020, including the tuition and fees deduction, the mortgage insurance premium deduction, the exclusion for mortgage debt forgiveness, the nonbusiness energy property credit, and a couple of vehicle credits.
Investors should focus on the usual year-end review of their portfolios for stocks they might wish to sell. They should be sure to understand how their capital gains and losses would be affected if they sold their stocks in 2020 or 2021. Capital gains realized might be subject to capital gain tax rates as well as a 3.8 percent tax on net investment income.
Retirement planning needs to focus on changes to the new distribution rules for IRA beneficiaries and the ability to continue to make IRA contributions after age 70-½.
Estate and gift planning may maintain a steady course as there will be less risk of a reduction in the unified credit in 2021 and, most likely, no increase in estate and gift tax rates in 2021. Low-interest rates will make a year-end gifting program attractive, especially since we expect rates to remain low into 2021.
If the Democrats take over the Senate in 2021, President-elect Biden may have a greater chance of enacting his proposed tax increases, including higher individual tax rates for taxpayers earning over $400,000 and higher capital gains tax rates on high-income taxpayers. His plan also includes increasing the corporate tax rate, and possibly raising estate and gift tax rates while reducing exemption amounts.
Over the next few months, we will be doing the tight-rope balancing act, walking the fine line of tax planning as we see what transpires in the Congress. Plan ahead and wear your safety harness!
As always, call C&B Accounting for advisement on any accounting or tax questions.