In consideration of the recent presidential election results, we’d like to review the main proposals under the Biden Tax Plan and share a few planning considerations. While we feel there’s a low probability of legislative change in 2021, it’s worth exploring how these changes might impact you in the future.

If legislation does pass consistent with Biden’s tax proposal, the income and estate tax landscape for high income earners and high net worth individuals will change significantly. The Biden Tax Plan proposes to increase ordinary income tax rates on income in excess of $400,000.  Significantly, it also proposes that capital gains rates for taxpayers earning in excess of $1M will be taxed at ordinary income rates, as opposed to the current favorable capital gain tax rates. Additionally, the lifetime federal estate transfer tax exemption is proposed to be reduced from $11,580,000 ($23,160,000 for couples) to $3,500,000 ($7,000,000 for couples).

Any proposed legislation will certainly go through rounds of negotiation and may not be the top priority of the Biden administration in 2021. Keep in mind that under current law, in 2026 the marginal income and estate tax rates that existed prior to the 2017 Tax Cuts and Jobs Act (TCJA) will be reinstated.

The considerations outlined below will take advantage of current law, however we acknowledge the hesitation to generate additional tax liability before year end, given the uncertainty around control of the Senate. Any income or estate planning related action should be taken in full consideration of your goals. Please consult us to discuss how these strategies might apply to your situation.

Income Tax Planning Strategies

If you hold highly appreciated securities, you may consider realizing capital gains in 2020 in order to reduce your exposure, in the event your total income will be in excess of $1M in future years, and thus capital gains might be taxable at ordinary income rates.

If you currently have, or anticipate having, income in excess of $400k, you might consider accelerating income into 2020 if possible, to avoid paying at higher rates in the future. This may involve realizing capital gains, exercising stock options, or processing Roth conversions. Alternatively, you may consider deferring deductible expenses such as business expenses, medical expenses or charitable contributions into 2021.

Estate and Gift Planning Strategies

Future planned transfers of significant wealth (in excess of $3 million) with the intention to eliminate estate transfer tax to another generation (assuming these funds are not needed for your lifetime expense needs) warrant review prior to year-end.

Spousal Lifetime Access Trust: If a $5.5M exemption amount would potentially expose assets to transfer tax after 2025, consider creating an irrevocable trust for the benefit of your spouse to take advantage of the current exemption amount. You must ensure the grantor spouse does not need these funds in the event the beneficiary spouse predeceases.

Grandchildren Trust: If you’re interested in funding a significant multigenerational trust for grandchildren, in excess of $1M, now might be an appropriate time to consider pursuing. The generation-skipping tax exemption amount is set to revert to $1M in 2026 and may be reduced in advance of this date.

Annual Gifting: You can give up to $15,000 per recipient, per year, without having to pay gift tax or tap into your lifetime estate and gift tax exemption. Your spouse can also give $15,000 to the same person, making for a total tax-free gift of $30,000 per recipient, per year.

  • Consider contributing to a 529 plan. You can front-load your gifts by contributing up to $75,000 per beneficiary in a single year. You’ll be treated as gifting $15,000 to that beneficiary in 2020, and in each of the next four years. Pennsylvania residents receive a state tax deduction limited to $15,000 per beneficiary, per taxpayer, each year.
  • Tuition payments made directly to an educational organization and medical payments made directly to a hospital or doctor’s office, on behalf of someone else, are not subject to gift tax or the generation-skipping transfer tax. These payments can reduce your taxable estate while preserving your annual gift tax exemption and lifetime estate exemption.

Charitable Contribution Strategies

The Biden Tax Plan may cap itemized deductions for high income earners. As such, consider bunching into 2020 the charitable donations that you would usually give over multiple years.

You may consider donating cash to take advantage of two tax rules that only apply in 2020:

  • In 2020, taxpayers that use the standard deduction (and do not itemize) can claim an above-the-line deduction of up to $300 per return for charitable cash contributions. This means individuals can take both the standard deduction and a deduction for up to $300 in cash contributions.
  • In addition, the 60%-of-AGI limit on charitable gifts of cash by individuals is suspended. Gifts of cash may be deducted up to 100% of Adjusted Gross Income in 2020; for large donations, selling high basis securities and donating the cash proceeds might be more effective than donating low basis securities.

We’ll be in touch regarding standard year-end planning opportunities, however please contact us immediately if you’d like to explore implementing any of the above ideas before year-end.