Tax Policy

So, What Happens With Tax Policy in November and in 2021?

Since March 2020, the U.S. Government has spent more than $3 trillion dollars in Coronavirus relief.  The government had previously been running at annual budget deficits of close to $1 trillion dollars per year.  And the nation faces an election in November with a possible change in administrations. 

So, what tax changes may be likely?  Two recent Wall Street Journal editorials have summarized a litany of possible tax changes.  Those items include:

  • An increase in individual tax rates to 39.6%.
  • An increase in the corporate income tax rate to 28%.
  • An increase in the applicable salary level for the payroll tax to $400,000.
  • An increase in the capital gains tax rate above the current top rate of 23.8%.
  • A repeal of stepped-up income tax basis at death.
  • A decrease in the estate and gift tax exemption from the present $11.58 million per individual to $5.79 million or lower.
  • A return to the deductibility of state and local income taxes above the current cap of $10,000.

At the same time, interest rates that are applicable to income, estate and gift transactions are at historic lows.

Many of our clients have asked, how do we account for these changes in their present estate plans?  We faced a similar dilemma back in 2012 when there was a fear that the then applicable $5M estate and gift tax exemption would be reduced to $1M.  Given our prior experience, we believe that our clients and their advisors should consider the following:

  1. If you have an individual taxable estate over $5.79 million, you may want to consider larger taxable gifts to your family members.
  2. Given the historic low interest rates, you might want to consider gifts into tax advantaged trusts or under a long-term promissory note.
  3. Given the potential for higher income tax rates in 2021, you may want to accelerate income, both ordinary and capital gain, into 2020.
  4. With changes in the STRETCH IRA rules under the 2019 SECURE ACT and the possibility of higher potential income tax rates, you might want to consider a ROTH conversion of your IRA.
  5. Finally, if you are presently making charitable gifts, you should consider making those gifts directly from your IRAs, rather than from other accounts.

These are just a few ideas.  There are several other items that should be considered.  If you would like to meet to discuss tax planning for 2020 and beyond, please click here.

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