Benjamin Franklin famously said, “In this world, nothing is certain except death and taxes.” That adage probably holds as true today as it did when he said it in 1789. This year we have multiple issues to deal with as we consider 2020 and the future. The change in the Executive branch could come with future tax changes, so some planning ahead is probably in order. This article will explore things you can do by year end to impact your 2020 situation, and it will also discuss how Biden’s tax plan could impact you.
As the current year comes to a close, here are a few quick reminders to help you possibly reduce your taxes and take advantage of the current tax laws:
- Make sure you have maxed out your Traditional or Roth 401K. The maximum contribution is $19,500 for taxpayers under 50, and $26,000 for folks over 50, including the $6,500 catch-up contribution.
- Depending on your tax bracket, take a look and see if it makes sense to continue doing traditional or Roth 401K contributions.
- You have until April 15th of 2021 to make traditional IRA or Roth IRA contributions. These contributions are income-tested, so you may or may not qualify depending on your total income and participation in an employer-sponsored plan.
- No distributions are required from your IRAs in 2020. You can still withdraw, of course, or look at this situation as an opportunity to do some Roth conversions.
- Per the stimulus (CARES Act), you can do a $100,000 hardship withdrawal that waives the penalty and spreads out the ability to pay the tax over three years. This could be a great strategy if you have been impacted by Covid.
- If your income is low, you may be able to lock in low/zero capital gains taxes.
- Bunch your charitable deductions. With the changes in the standard deduction, it may make sense to increase your donations to get over the standard deduction amount and do multiyear donations in one year.
- Max out your HSA (Health Savings Account). The maximum contribution is $7,100 per family, or $3,550 for individuals. If you are over 50, you can add another 1,000 to your account.
- The SECURE Act now allows taxpayers over 70.5 years old to make IRA contributions. To qualify, you’ll need to have earned some income, but this is a new policy for this year.
- Tax loss harvesting is the process of selling securities and rebuying similar securities to lock in tax losses. We talked about this process in detail recently in our article Tax Loss Harvesting.
- Estate planning – Remember, you can gift $15,000/year to any individual and not be subject to gift taxes. A special rule for 529 plans, called “super funding,” is highly complex, but we can give you details on it if you like.
For small business:
- The CARES act (a.k.a. stimulus) allows you to carry back losses for up to the prior five years. Therefore, if you’re expecting a loss this year, you can claim that loss in previous years and free up some tax dollars.
- Establish a retirement plan. The SECURE act offers tax credit incentives from $500 to $5,000 for establishing an employee retirement plan.
- Take advantage of generous depreciation tax breaks. One hundred percent of first-year bonus depreciation is available for property placed in service this year.
- For vehicles over 6,000 pounds, with bonus depreciation, you may be able to write off an entire vehicle/take a large deduction. You have to use the vehicle for at least 50% business purposes for this deduction to apply.
- For other vehicles, you can take a maximum of $18,100 of depreciation in year one (including bonus depreciation), and then $16,100 in year two, $9,700 in year three, and then $5,760 for years four and on.
- Section 179 (business qualifying property) limits have been increased to $1.04M for 2020.
- Defer income/paying expenses by year end. If you anticipate being in a different tax bracket next year, deferring income into the next year or paying expenses in 2020 could be beneficial. However, the picture is a bit muddy here, depending on what happens with future tax rates…more on that later.
Future tax rates/planning consideration:
Doing tax planning for multiple years is probably more complex now than it has been in many years. First of all, the current individual tax rates (which were cut in 2018) are going to expire in 2025. When the tax law was passed, the Senate capped how much tax cuts are allowed to add on to the national debt. On top of this expiration, if the senate majority goes to the Democrats, we could see a rollback of these rate cuts and some changes. As of this writing, the following are what the Biden tax changes could be:
- Capital gains taxes – Taxpayers could see capital gain rates at the same level as regular/ordinary tax rates, which could be 39.6% from the current 20%. But this hike only applies for people with income over $1,000,000.
- Charitable donations capped at the 28% bracket. This cap would mean that the maximum tax break would be 28% on charitable donations, versus 37%, which is the current tax bracket.
- A general rollback of the current tax rates to what they were in 2016, which means the top tax bracket moves to 39.6% from 37%.
- Estate tax threshold – Currently, the first 11.08M of assets per person are tax free. This number could be reduced, so making gifts/trust planning by year end could be very important.
- Corporate taxes raised from the current 21% to 28%.
- Social security wage cap – Currently, you pay social security taxes on the first $137,700 of wages. The proposed tax plan would take that number to $400,000.
- An increase of the child credit to $3,000 from $2,000.
- Raising the child and dependent care credit from $2,100 to $8,000.
Of course, these changes are just proposals and political talking points. We really don’t know what a tax overhaul would look like. At the end of the day, we have soaring deficits and a lack of revenue, so at some point either taxes have to go up or big cuts to government spending have to materialize.
I really don’t anticipate any tax law changes in 2021. It could take many months for the new administration to be seated and propose, negotiate, and pass a tax plan. We are not likely to see a retroactive tax increase, as that is very difficult to do logistically, and we are likely to still be in a recession/contraction next year as well, which isn’t a good time to make tax policy changes. Of course, I also didn’t anticipate a global pandemic last year either, so anything could happen!
We will keep you updated on changes that could impact your taxes or your finances as we go into the new year. As always, the only “dumb” question is the one that isn’t asked. Your financial planning team at Bluerock is here to assist you in any way possible. Stay safe and healthy!