By Scott Moser 

Sailing into the final quarter of 2020 may require navigating some rough weather.  Smart sailors will want to have contingency plans in place to deal with conditions as they unfold.  We encourage all sailors to outline several possible yearend tax strategies to be prepared no matter which direction the election winds blow.

Most of you will want to have 2 plans in place in response to November’s election outcome.  A win by the incumbent party presents the easier plan, we’ll refer to it as Plan A.  This outcome will likely call for deferring capital gain income into future years where the rate could potentially decline or more opportunities to defer gains could evolve.  However, since ordinary tax rates are currently relatively low, one should carefully consider if fully funding retirement accounts is optimal.  The large deficit spending will need to be covered by future tax increases so those retirement contributions may produce greater tax savings down the road when rates rise.  For example, if your income in retirement is likely to be the same as it is today, consider a 5 year plan to increase ordinary income to reach a tax bracket that is +-5% above your current bracket since your tax bracket in 2026 is likely to be +-5% higher than it is today; remember that under current law,  many of the 2017 tax reductions expire on 12/31/2025.  For existing retirees, estimating annual changes in your tax bracket as all retirement benefits kick in, may provide some obvious opportunities.  Keep in mind the non-tax impact of higher income such as higher Medicare premiums when adjusted gross income increases.

Plan B is little more complicated.  A Biden win would likely mean higher taxes could come before 2026.  But without sweeping the House & Senate, Biden may have trouble implementing much of his tax policy.  So let’s focus on what happens if the Democrats sweep in November.  In this case, we’ll likely see a new tax law in late 2021 or sometime in 2022.  Current proposals include the following:

Ordinary tax rates increase by 2.6% to 39.6% 
Capital gain rates disappear when income exceeds $1.0 mil.  
Itemized deduction phase outs return for high earners though deduction for taxes would be restored for most
Corporate taxes increase from 21% to 28%
Possible end of the step-up in basis at death-- can a reduction in the $11.8 mil. lifetime exemption be far behind?

In this scenario, accelerating income into 2020 & 2021 before rates increase may be prudent.  Expect many investors to incur capital gains in 2020 while rates are low; this selling along with the adverse impact of higher business taxes on corporate earnings could place a damper on the stock market recovery!  Consider deferring expenses until rates rise--  to maximize the tax deduction benefit.  Funding Roth accounts now, which grow tax free, could be a better option, and plan to fund tax deductible retirement accounts after higher tax rates are implemented.  Consider a Roth conversion now to accelerate income into 2020.  Defer larger charitable funding until rates rise,  a Donor Advised Fund (DAF) is a great way to maximize your charitable deductions.  These are just a few of the steps you should consider.

To summarize, when are you likely to see significant increases in your taxes?  Under the Plan A Trump win,  you probably have 5 years;  if Republicans retain control of the Senate you have 3-5 years and under a Plan B Democratic sweep, less than 2 years!  Given the likelihood of a Democratic sweep and with at least some possibility of a retroactive tax act, we encourage everyone to start their planning before you lose the wind in your sail!  We are expecting a busy yearend planning season so get your reservation early!