Tax and Estate Planning in 2020: Four Months Left
This difficult year is quickly coming to a close. Thank goodness! The election in November is huge in terms of how one should view 2020 tax and estate planning moves. If elected, Joe Biden’s tax plan consists of proposals to raise taxes on individuals and businesses. State and local governments will also impose increased taxes and fees on individuals and businesses. Deferring tax obligations is possibly not in vogue this year. Selling capital assets, paying income tax and completing 1031 exchanges may end up being the best planning moves before we say goodbye to 2020.
Highlights of Mr. Biden’s tax plan include the following:
- Increase in the corporate income tax rate: The Biden camp proposes to increase the corporate tax rate from 21% to 28%.
- A minimum corporate tax rate: Mr. Biden proposes a minimum tax of 15% on companies with $100 million or more in annual net income. This minimum tax will operate as an alternative minimum tax, with corporations paying the greater of their normal income tax rate or 15%. Net operating losses will continue to carry forward and foreign tax credits will continue to be available.
- Individual marginal income tax rate increase: Mr. Biden plans to return the top marginal income tax rate to 39.6%. Currently, this top marginal rate applies to earned income above $518,400 for single filers and over $622,050 for married couples filing jointly.
- Reinstitute the payroll tax on the top 1%: Currently all income between $.01 and $137,000 is subject to the 12.4% payroll tax that funds Social Security. Mr. Biden seeks to have this tax apply to income above $400,000. Income between $137,000 and $400,000 would continue to be exempt.
- Increase of the capital gains tax rate on filers with incomes above $1.0 million: Biden’s proposal will tax filers with over $1.0 million in income at ordinary income tax rates. The Net Investment Income Tax will continue to apply to these filers for a total tax rate of 43%.
- Limit itemized deductions: Mr. Biden proposes a cap on itemized deductions of 28%. A taxpayer or couple filing jointly will only receive a maximum benefit of $0.28 for each dollar of itemized tax deductions. This includes charitable contributions.
- Small business income deductions phase out over $400,000: Mr. Biden intends to phase out the qualified business income deduction (generally for pass-through income from partnerships and S corporations) for individuals with income exceeding $400,000. These provisions will effectively increase the tax rate on some pass-through income from 29.6% to 39.6%.
- Stepped-up basis elimination: Mr. Biden’s plan will end the practice of stepping-up the cost basis of inherited property to fair market value at the time of death.
- Increase the estate tax rate. Mr. Biden has suggested raising the estate tax rate which is currently set at 40%.
- Decrease in the estate and gift tax exemption. The current estate and gift tax exemption of $11,580,000 is set to decrease on January 1, 2026, to $5,000,000. It is anticipated that any tax reform will seek to lower the exemption under a Biden administration.
- Repeal the rules related to like-kind exchanges: Mr. Biden proposes to repeal the ability of taxpayers to avoid deferring capital gains taxes on the sale of real property if the sales proceeds are invested in replacement property valued the same as the original property within 180 days of sale.
It is imperative to think through possible planning moves if you have not already done so. Waiting for the results of the election is not practical for a lot of reasons. First, that will only give you seven weeks to plan and implement your plan. If the election results are contested, the outcome of the election may not be known until 2021. Getting a plan in place now that can be implemented in late November or December is the best course of action.
Considerations include the following:
- Maximizing annual gifting: This should always be a part of planning, irrespective of an unpredictable economy, election or likely changes in estate tax law. An individual can gift up to $15,000 to any individual without incurring a gift tax or using up the lifetime exemption.
- Use of lifetime exemption: As stated above, the 2020 lifetime exemption from estate tax is $11.58 million per person. So, a couple can gift up to $23,160,000. Carving out appropriate assets and contemplating trust structures to effectuate gifting to use up as much of the lifetime exemption as possible should happen now.
- Completion of 1031 exchanges: If you are contemplating a 1031 exchange, do it this year. Do not wait until next year.
- Stop deferrals and pay tax: If you have been implementing deferral strategies, you may want to stop and pay tax in 2020.
- Recognize capital gains: If you want to sell a capital asset you may consider completing the transaction this year.
- Installment sales to irrevocable trusts: A deterrent to completing an installment sale to an irrevocable trust is the elimination of a step-up in basis upon death. If the step-up is eliminated, you will not lose out on this benefit by doing the installment sale. So, there will still be a good estate tax planning tool still in play next year if needed.
These are just a few of the items which need to be considered. The key to all planning is to integrate all tax and estate tax moves with your estate plan, asset protection plan and retirement/succession plan. Less than four months remain so now is the time to get organized.