INSIGHT: Year-End Planning Amid a Year of Uncertainty

Sept. 25, 2020, 8:01 AM

This year will likely go down in the record books as one of the most disconcerting and unexpected times we’ve experienced in quite a while. As we head toward Dec. 31, there are, as always, many tried and true planning strategies that should be considered. However, with an election on the horizon, it’s important to be mindful of what that might mean for your tax situation. Let’s look at some of the more common year-end planning considerations and how potential tax law changes might inform your decisions.

Estate tax planning

With the current federal estate, gift, and generation-skipping transfer tax exemption at an all-time high of $11.58 million per person, now may be the time to speak to your tax advisors about whether you’ve taken advantage of the many opportunities this offers for multigenerational wealth transfer. While this exemption is due to sunset on Dec. 31, 2025, a change in the White House could affect this amount. Presidential candidate Biden’s proposed plan does not include any specific details and only states that it should go back to a “historical norm” with reference to “2009 levels” which can mean $3.5 million in estate tax exemption and $1 million in gift tax exemption.

If you utilize the higher exemption before it may change, the IRS has indicated that it will not be “clawed back” in the event a future federal transfer tax exemption amount is lowered. If you don’t have time to execute more complicated strategies that include asset valuations before the end of the year, you may consider funding a trust with cash now, and then using a swap power later to get assets into the trust.

Another gifting consideration is to use your annual gift exclusion, which enables you to make gifts each year of up to $15,000 (or $30,000 for a married couple) in cash or property to an unlimited number of individuals without incurring any gift taxes or reducing your lifetime exemption from gift tax. Many family members and loved ones may be struggling more this year due to the pandemic, so this presents an excellent opportunity to provide support in a tax-efficient way.

Income tax planning

Individual income tax

A general rule of thumb at year end is to minimize the receipt of income to defer income tax and maximize expenses to decrease your taxable income for the year. If Biden wins the election, there could be a raise in income tax rates (ordinary income and capital gains) and proposed limitations to various deductions, so it’s important to analyze whether conventional wisdom needs to be reevaluated. It may be better to take income this year (before rates go up) and defer expenses/deductions next year, as deductions are worth more when rates are higher. Your tax advisor can assist you in making realistic projections for your situation.

Capital gains

Tax loss harvesting is another general rule of thumb at year end—sell a security to “harvest” the gain to be offset by a loss. Remember that short- and long-term losses are netted against short- and long-term gains, respectively, and also be mindful of the wash sale rule.

Under the Biden proposed plan, for tax filers with incomes over $1 million the long-term capital gains rate will be taxed at 39.6%; the net investment income tax of 3.8% will apply for a total capital gains rate of 43.4%. If you have losses this year and believe that the capital gains rates may go up, you may harvest the gain in 2021 and “save” the loss from 2020 against that future gain. This strategy, of course, runs the risk of not knowing how and when tax law will change, and that the gain will not be erased between now and 2021 when you harvest it. At the end of the day, it still should be an investment decision.

Qualified business income deduction

If you are benefiting from the qualified business income (QBI) deduction (also known as Section 199A deduction), keep in mind that Biden’s proposal is to limit this deduction so that it phases out for incomes in excess of $400,000. Therefore, a careful analysis of the timing of deductions over the next few years to ensure the use of this QBI deduction would be prudent.

Maximize tax-advantaged accounts

Tax-advantaged accounts such as employer-sponsored 401(k) plans, 529 education plans, IRAs, and health savings accounts may offer tax deductions upon contributions, tax-free growth of funds while inside the account, and potential tax-free distributions if permitted by the plan and certain requirements are met. Should income tax rates go up under a Biden administration, utilizing these accounts for maximum savings will become even more important.

Charitable gifting

Carefully timing and planning for your long-term philanthropic goals could be maximized under today’s tax laws, as the charitable deduction is one of the last standing deductions after the 2017 Tax Cuts and Jobs Act. However, it’s important to consider that if Biden wins the election and tax rates do increase, you may be better off making charitable donations in 2021 so that you can take the deduction when rates are higher.

It’s also important to consider two provisions that were enacted through the CARES Act that provide additional benefits this year for cash gifts to public charities. For the majority of taxpayers who do not itemize, there is now a $300 above-the-line deduction in addition to the standard deduction, but only for cash gifts to public charities. For itemizers, the usual deduction limit for gifts of cash to public charities—60% of adjusted gross income (AGI)—is increased to 100% of AGI.

A final word

While many of these strategies are good housekeeping at year end, this is not your normal year. No one has a crystal ball as to who will win the election, and certainly no one can say with any certainty what happens to campaign proposals or current tax laws regardless of what happens. Emotions are already running high this year, and tax planning should not be a victim of that. In conjunction with your tax advisor, make the best educated decision you can under the circumstances—having a detailed and sound financial plan with as accurate as possible projections is key. This is the only way to quantify and maximize your after-tax earnings and assets in the long run.

This column doesn’t necessarily reflect the opinion of The Bureau of National Affairs Inc. or its owners.

Author Information

Alvina H. Lo is Chief Wealth Strategist at Wilmington Trust, N.A.

©2020 M&T Bank Corporation and its subsidiaries. All rights reserved.

This article for general information only and is not intended as an offer or solicitation for the sale of any financial product, service or other professional advice. Wilmington Trust does not provide tax, legal, or accounting advice. Professional advice always requires consideration of individual circumstances. Investing involves risk and you may incur a profit or a loss. There is no assurance that any investment, financial or estate planning strategy will be successful. These strategies require consideration for suitability of the individual, business or investor. Wilmington Trust is a registered service mark used in connection with various fiduciary and non-fiduciary services offered by certain subsidiaries of M&T Bank Corporation.

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