A lot’s being written right now about how to prepare for the Biden tax plan. There are click-bate headlines warning of actions you must take now before December 31, 2020. Before we take any tax planning actions, we need to consider the various scenarios that could unfold.
First, we won’t know until after January 5, 2021 what the composition of the Senate is. If Republicans retain even one of the two seats, they will still have a majority. Democrats would have to take both seats to have a 50-50 tie that could be broken by the Vice President. With divided power, any tax changes would need to be the result of compromise. Even if democrats gain control of the Senate, the party has many divergent view points on tax policy. So what’s in the Biden tax plan is still extremely unlikely to be exactly what gets enacted into law.
Second, timing is an issue. With the COVID-19 crisis, the incoming administration will likely have higher priorities than tax reform in 2021. So any changes may not occur right away. It’s possible that tax changes could be enacted in 2021 and made retroactive to January 1. But this timetable seems unlikely.
We’re not going to recap the entire tax plan in this blog. You can view the Wall Street Journal’s summary for that. I would like to discuss what most people should do now in response to the potential for changes.
Tax Planning Action Before Year-End
As we consider year-end actions in anticipation of the Biden presidency, there’s one action most of us should take. If you aren’t able to itemize this year, or some of your deductions are capped (like state property tax or income tax), then defer those deductions where possible to next year. For example, if you’ve already made enough cash charitable contribution to make the $300 above-the-line deduction, hold your other donations to January 2. While we don’t know that changes will occur to make them helpful next year, we know they won’t help us this year.
There may be a few very specific other actions to take for unique situations. For example, if you know you’re going to incur a large capital gain in 2021 but have the option to incur it in 2020 instead, it may be worth considering different strategies. We would encourage you to visit with us or your tax planner about any potential opportunities.
Future Opportunities
Planning opportunities will be plentiful after any tax law changes occur. There are potential changes in the estate tax regime, step-up in cost basis of inherited assets, treatment of capital gains as regular income for high income earners, and more. If any of these changes, or others like them, come to fruition, revisiting your tax planning, investment strategy, and estate planning will be critical.
How We Do Tax Planning
At Keener Financial Planning, we incorporate tax considerations into your overall financial plan. We think that’s financial planning done correctly.
If you’re in retirement distributions, tax planning can include:
- Determining which accounts to draw from to create lowest lifetime tax burden
- Planning for the Affordable Care Act
- Roth conversions
- Qualified charitable distributions
- Harvesting long term capital gains or losses
- And much more
We also work with those in the accumulation phase to save in the most tax-efficient way. And our investment strategies are always designed with after-tax returns in mind. Most importantly, we’re reviewing your tax return and coordinating with your tax preparer for opportunities that can help you meet your goals most easily.