Preparing in Advance

The differences in tax policy between Presidential candidates Donald Trump and Joe Biden are pretty significant.  Current polls show the Democratic candidate with a substantial lead, which suggests we should prepare for the possibility of a different tax regime in 2021.  But what, specifically, should we evaluate as the elections approach?

According to the Biden proposal, taxes would increase on individuals with yearly incomes above $400,000, specifically the highest bracket would increase from the current 37% to 39.6%.  Social Security taxes would stay the same for most Americans: 6.2% assessed on the first $137,700 of income.  But his proposal would then add a 6.2% Social Security tax on any income above $400,000.

The assumption here is that if you are earning less than $400,000 a year, you may not experience much change.  But people who fall into the higher income category might consider strategies to shift future income into the 2020 tax year. For example, executives with non-qualified stock options that produce ordinary income taxes could sell in 2020 rather than 2021. That said, taking “permanent” actions in an effort to optimize “potential” changes carries great risk.  We highly recommend discussing any potential actions with your Kaizen advisor.

The Biden plan also proposes raising capital gains taxes on taxpayers with more than $1 million in income—so when a person sells stocks and ETFs for a profit, the gains would be taxed at a 39.6% rate, even if they were held for more than a year.  It could make sense for those individuals to time their gains and losses, selling assets in 2020 to take advantage of the lower (20%) rate now.

Finally, a President Biden would push for a reduction in the estate tax exemption of $11.58 million per person, down to $5.49 million, adjusted each subsequent year for inflation.  People affected could consider getting assets out of their estate before the laws are changed.  They could accelerate their gifting programs—and, because Biden’s proposal would also eliminate the step-up in basis at death, the best assets to gift would be highly-appreciated stock or closely-held shares.

Due to the stratification of wealth in America, most Americans should not be affected by these proposals so they may not be of major concern. But, for those who would be impacted, it may be prudent to understand how his tax proposal is likely to impact you.  If you have any concerns about your personal situation, please don’t hesitate to reach out to your Kaizen Advisor.  We are here to help guide you through life’s financial changes.

Source:

https://www.cnbc.com/2020/09/08/op-ed-here-are-some-smart-tax-moves-to-m...