Year-End Tax Planning with a Twist

Year-End Tax Planning with a Twist

Tax Planning text on Note pad

As we do each year, we are in the process of completing full year-end tax planning reviews for our Clients. In addition to our standard review, we are also considering the impacts of the changes made this year in response to the pandemic, as well as potential changes on the tax horizon from President-Elect Joe Biden. Continue reading for an in-depth review of the work we’re doing for you.

Usual Year-End Tax Planning

As we do each year – Presidential elections, proposed tax law changes, and pandemics aside – we’re in the process of doing full year-end tax planning reviews. This includes looking at expected end-of-year portfolio distributions from the mutual funds held in your accounts and the potential for harvesting losses or gains as is appropriate to your situation (if at all), and considering Roth Conversions if you are expected to be in a low tax bracket.

If we review your situation and believe you need to act, we will reach out to you with our analysis and thoughts. And then we’ll loop in your tax preparer – the expert and final say in this realm! We want to be sure that all members of your team are on the same page so that these strategic planning opportunities are executed in the most advantageous manner.

Changes in 2020 (CARES Act and SECURE Act)

In addition to the usual year-end tax planning, there were changes made for 2020 due to COVID:

  • Required Minimum Distributions were NOT required in 2020 and the required beginning age for your first RMD from your retirement accounts was delayed to 72. If you are subject to RMDs, we reached out earlier this year with our recommendation for your situation:
    • If you had not yet taken your RMD and do not need it for ongoing spending, we recommended you skip the RMD this year.
    • If you had taken your RMD and do not need it for ongoing spending, we recommended you roll it back into your IRA (and helped complete that transaction prior to the 8/31 deadline); and
    • Regardless of whether you had taken your RMD yet or not, if you do need it for your ongoing spending needs, we recommended proceeding as you usually would and taking the RMD.
  • All taxpayers will be allowed a $300 above-the-line deduction for cash charitable contributions made. This is a special 2020 allowance and will offset your income dollar-for-dollar. Above-the-line means the deduction will reduce your Adjusted Gross Income (which is then further reduced by the Standard or Itemized Deductions and other deductions).

Potential Biden Changes in 2021 (or later)

First and foremost, we feel it is important to share that the below changes are far from being set in stone. The finalization of the election in Georgia in early January will be a significant determining factor in knowing what changes, if any, are likely to be serious topics of conversation in the coming year. And even then, we can be sure there will be at least some opposition to these proposals and the final outcome might look very different from Joe Biden’s stated and inferred wish list.

We are reading constantly, paying close attention, and thinking about all the possible ways these potential changes might affect you. We think, in general, it boils down to: taxes may stay the same next year and they may go up next year…we know they won’t go down. So, to the extent you expect your total income to be over $400,000 or over $1,000,000, consider accelerating income, capital gains, charitable donations, and gifts to reduce your estate. If you have state and local taxes above the current $10,000 limitation, consider making your Fourth Quarter state estimated tax payment in January (rather than in December if that is something you like to do). Otherwise, we don’t think anything is certain enough about the potential changes in the coming year to force action that you don’t otherwise expect to take related to your financial situation.

Here’s a brief review of some of the main changes being discussed:

  • Income Tax Rates
    • Biden and Harris are vowing that those who make less than $400,000 a year won’t see any changes in their income taxes. Those making more than $400,000, however, could see increased income tax rates back to the pre-2018 levels (meaning up to a maximum bracket of 39.6% versus the current 37%). Those higher rates, however (as is currently the case with our tax brackets), would only be applied to the income above that $400,000 threshold.
    • If you have income you could accelerate into 2020, there may be strategic reasons to do so. If the tax rates stay the same, you may well be in the same boat whether you realize that income in 2020 or 2021 (depending on a full projection of your overall income in both years). If the income tax rates go up next year, depending on the magnitude of the changes, you could be better off accelerating that income into 2020.
    • As part of our annual year-end planning reviews, we will be reviewing whether income acceleration (like converting Traditional IRA funds to Roth or harvesting capital gains) makes sense for you and will reach out if we believe you need to act.
  • Capital Gains Tax Rates
    • Biden is proposing to get rid of advantageous long-term capital gains and qualified dividend rates for those with income over $1,000,000. Currently, this type of income is taxed at a maximum of 23.8% federally and Biden’s proposal would increase this maximum rate to 39.6%.
    • If you have significant capital gains you expect to incur either this year or next, it might make sense to consider accelerating gains into 2020, taking into account the totality of your tax situation in 2020 and in 2021.
  • Social Security Taxes
    • Biden is proposing to create a Social Security donut hole of sorts. Currently, your wages are subject to Social Security Income only up to a threshold ($142,800 in 2021). This change would cause the Social Security tax to again kick in on wages above $400,000.
    • Accelerating wage income in the form of stock options could make sense.
  • State and Local Tax (SALT) Limitation
    • This is a big change that could be quite beneficial to many of you! The Tax Cut and Jobs Act (TCJA) of 2017 imposed a $10,000 limitation on the amount of state and local taxes paid you could deduct. For many people, especially in high income tax states like California, this greatly reduced the amount of itemized deductions available against income and, thus, increased taxable income. Biden is proposing to remove this limitation (although another proposal would still limit overall itemized deductions).
    • If you know you will be above that $10,000 threshold in 2020 before making your Fourth Quarter state estimated tax payment (if applicable), there is a potential benefit to waiting until January to make that payment versus paying early in December if you like to do that (just be sure to make it by the due date of January 15!).
  • Charitable Giving and Itemized Deductions
    • Speaking of itemized deductions, another proposal Biden has shared is limiting the overall benefit of itemized deductions one can take to 28 cents on the dollar for anyone with more than $400,000 of income, even if their marginal tax bracket (and therefore their usual/expected percentage benefit for each dollar of deductions) is higher.
    • If your income is expected to be higher than $400,000 in 2021 and charitable giving is part of what Live Big®means to you, it could make sense to accelerate any large charitable donations into 2020 (subject to the current limitations for deductibility).
  • Estate Tax Exemption
    • Another possible change is the reversion back to pre-TCJA estate-and-gift tax laws, meaning the available exclusion would drop from the current $11,580,000 per person in 2020 to $5,790,000 per person.
    • This sunset is already scheduled to happen in 2026; Biden’s proposal would make it happen sooner.
  • Step-Up in Basis on Inherited Assets
    • Another big proposed change would eliminate the step-up in cost basis on inherited assets – this could mean the beneficiary inherits the decedent’s assets or the assets are deemed to be sold (and thus capital gains taxes due) at the decedent’s death.
    • Interestingly, according to Jeffrey Levine of, there have only been two attempts to eliminate the unlimited step-up in basis in the last 50 years and both have been unsuccessful.
  • Qualified Business Income (QBI) Deduction (Section 199A)
    • This deduction, which originated from the TCJA in 2017, is potentially on the chopping block for those earning more than $400,000 (though not yet explicitly stated by Biden or his team).
  • Tax Credits
    • A few tax credits are proposed to be increasing (or newly introduced):
      • Child Tax Credit – increased to $3,600 per child under 6 and $3,000 per child under 17 (up from $2,000)
      • Child and Dependent Care Credit – increased to $8,000 for one child, $16,000 for two or more (up from $3,000/$6,000)
      • First Time Homebuyer’s Credit – advanceable refundable credit of $15,000
      • Caregiver Credit – $5,000 for informal, long-term caregivers of others

While there are a lot of potential changes on the tax horizon, nothing is a sure deal. As you know, we’re not big on making short-term predictions, and it’s far from a sure bet that the Democrats will win both seats in Georgia. And even if they do, there will be many discussions before a final tax overhaul is released. If we think you need to take action before the end of the year, we will reach out to you to discuss. If you have specific questions or new updates to share with us, please reach out. Otherwise, we’ll continue to keep an interested eye and ear on the pending changes and implications for your Live Big® life.