As I write this note, the U.S. presidential election looms large. With just six weeks to go, we’ve all seen an increase in political activity—attack ads, get out the vote drives, and the occasional boat parade—plus more frequent commentary on what tax policy might look like following a “Blue Tsunami,” should the Democrats win the presidency and both houses of Congress.
Most tax policy debate we have observed centers around the timing of changes—specifically, whether any potential tax law changes will be retroactive or prospective. If the Democrats do manage to sweep both chambers and the White House, many of Candidate Biden’s tax provisions will likely pass in 2021. Yet, even in this scenario, the question remains: Will legislation enacted in 2021 be effective for tax year 2021 or 2022? Historically speaking, most tax law changes are prospective, though there are instances of provisions being applied retroactively to the current tax year.
Below, we highlight some of the key provisions of Candidate Biden’s tax policy and associated planning opportunities for your consideration. Which provisions become law and which tax years they may effect remain unknowns, so use this information only to begin conversations with your advisors about how the possibilities apply to your unique situation. This should not be construed as tax advice.
Individual Taxpayer Provisions
- Increase the top individual tax bracket from 37% to 39.6% and impose a 12.4% Social Security payroll tax on income above $400,000.
- Limit itemized deductions to 28% for taxpayers in higher income tax brackets; however, Biden also seeks to repeal the current $10,000 cap on state and local taxes.
- Tax capital gains and qualified dividends for those earning more than $1 million at 43.4% (39.6% + 3.8% Medicare surtax), up from the current rate of 23.8% (20% + 3.8%).
- Phase out the 20% qualified business income (section 199A) deduction for partnerships and S corporations for those earning more than $400,000.
- Accelerate income from 2021 into 2020.
- Exercise stock options, both ISOs and non-qualified.
- Implement Roth conversion strategies (if appropriate).
- Consider qualified charitable contributions from IRAs, as these will become more important.
- For business owners selling their businesses, push to close in 2020 versus 2021.
- Accelerate itemized deductions in 2020 for those impacted by any limit. While this could be counter-intuitive with higher income tax rates, the value of an itemized deduction may be greater now than when capped at 28%. The CARES Act increased the cash contributions to public charities limit to 100% of AGI in 2020. Do you have an opportunity to prepay 2021 giving in 2020?
- If itemized deductions are not significantly greater than the $24,800 standard deduction for couples, consider staggering itemized deductions and the standard deduction in 2021 and beyond using a donor-advised fund. This strategy allows taxpayers to bunch charitable giving in one year while spreading distributions over multiple years.
- If taxable income exceeds the threshold for the higher capital gains rate, consider harvesting gains in appreciated securities to reset your cost basis. Recall that Balentine proactively harvested losses during the March stock market crash, which can be used to offset potential gains in order to minimize or eliminate any tax impact. Proactive tax-loss harvesting will become more valuable going forward.
- Pay closely held C corporation dividends in 2020.
Estate and Gift Taxpayer Provisions
We are in an ideal estate planning environment due to a confluence of factors: the historically high estate and lifetime gift tax exemption, potentially lower business valuations, and historically low interest rates that have driven the rates used in many asset transfer techniques to equally historic lows. Even if Biden is not elected or he fails to pass some of these proposals, it may be a good time to address legacy-planning goals.
- End the step up in basis for capital gains at death. It is unclear whether capital gains will “carry over” (original basis will still apply) or be taxed at death.
- No specific changes to the unified estate tax and lifetime gift tax exemption are defined, though it is likely this will roll back before its scheduled sunset in 2026 and may be reduced further. Some commentary suggests the gift tax exemption could fall to $1 million and estate tax and generation-skipping transfer tax (GST) exemption to $3.5 million, a far cry from the current unified exemption of $11.58 million.
- Potentially eliminate or reduce intrafamily transfer strategies such as valuation discounts and grantor retained annuity trusts. This will increase the “cost” of strategies to shrink one’s estate.
A multitude of planning opportunities deserve thoughtful consideration given the environment, and it is important to bear in mind that these ideas take time to execute. Also remember, you do not need to act just because an opportunity is available to you. Before implementing a tax-efficient strategy, pause to determine whether the move aligns with your goals and values.
- Execute strategies that incorporate valuation discounts for closely held businesses or minority ownerships while you can.
- Complete significant large gifts. This can include outright gifts, forgiving outstanding notes, and refinancing existing notes, among others.
- Gift highly appreciated assets versus cash to both tax-exempt charities and individuals in lower tax brackets. For those whose income triggers the highest capital tax rates, this is especially important.
- Utilize installment sales within the family or to business partners.
Taxpayers will gain additional clarity around potential tax law changes beginning on November 4, but we encourage you not to wait six more weeks to commence your planning. Start having conversations now with your advisory team to develop a strategy for how to proceed when the time comes.