Mitchell Starr
Partner, Bienenfeld, Lasek & Starr LLC
2020 has been a year of uncertainty.
It’s been quite a year, from the unexpected impact of the pandemic to the unpredictability of the presidential election and the underlying question of which political party will control the Senate.
Even in these uncertain times, there is one thing of which we can all be certain: Taxes.
Tax law changes can be a complex and lengthy process, and must be passed by Congress – the President cannot place them into law via-executive order. Currently the Senate is split at 50-48 in favor of the Republicans, with a special runoff election for both Senate seats in Georgia, scheduled for January 5, 2021. Should the Republicans lose both seats, a 50-50 tie in the Senate would be broken by Vice President Harris’s vote. Conventional wisdom states that a Republican controlled Senate will not pass the Biden/Harris tax plan as is. While the odds favor the Republicans retaining a majority in the Senate, it is not out of the question that the Democrats could pull the upset in the runoffs or that there could be a bipartisan compromise leading to an implementation of a watered-down version of the plan.
All of this being considered, there is no better time to consider tax-saving strategies than the final quarter of the year.
The election raises some interesting year-end tax-related questions for you to consider:
To gift or not to gift? The 11.7-million-dollar question
How the election will affect The Gift and Estate Tax Exemption is an $11.7 million dollar question. The Biden/Harris Tax Plan proposes changes to the tax code that would reduce the federal gift and estate tax credit in 2021 from $11.7 million per individual to potentially as low as $3.5 million. If left alone, the current estate tax exemptions are scheduled to sunset in 2025, going back to a pre-Tax Cuts and Jobs Act of 2017 level of $5.49 million indexed for inflation. Though none of us have a crystal ball to foresee the results of the Senate runoff elections in January, the decision about the exemption should be part of your end-of-year conversation with your financial planner.
Long-Term Capital Gains vs. Short Term Capital Gains
Currently the Biden/Harris tax plan calls for the elimination of Long-Term Capital Gains rates for individuals/families earning more than $1mm annually. This would move their potential tax liability on unrecognized gains from 23.4% to potentially as much as 39.6%. Despite a very turbulent year in the markets, many people hold positions that are up significantly. Speak to your advisor about the potential to tax loss harvest* to reduce your current tax liability. It might also make sense to discuss the possibility of registering gains in 2020 as Long-Term Capital Gains should you be in the income tax bracket in 2021 ($1mm+) and beyond that could possibly lose the benefit of Long-Term Capital Gains tax rates under the Biden/Harris tax plan.
Step-up in Basis no more?
One additional change proposed in the current version of the Biden/Harris tax plan is doing away with the step-up in basis rule for appreciated assets of deceased taxpayers. This change, coupled with the potential Long-Term Capital Gains change, could influence yearend gifting considerations.
Use it or Lose it? Spousal Lifetime Access Trust
Many of our clients are also asking about setting up a Spousal Lifetime Access Trust (SLAT) which can reduce your taxable estate by making lifetime gifts. In addition to the tax benefit, the beneficiary can receive trust distributions from which you may both benefit. Please note, you should always consult with your attorney or legal advisor regarding the drafting of this or any trust.
As of 2021, under the Tax Cuts and Jobs Act of 2017, you can give up to 11.7 million dollars per person. But will the new administration lower the exemption to raise revenue? While the answer to that question is unknown, the question of whether to use it or lose it is worth a conversation.
Take or Skip It? Required Minimum Distribution
There is a minimum amount a retirement plan owner must withdraw annually or pay a stiff penalty. Due to changes made by the SECURE Act if your 70th birthday is July 1, 2019 or later, you do not have to take withdrawals until you reach age 72; however, due to the provisions of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) which was put into place in response to the economic fallout of the pandemic, those who don’t need the money can skip their 2020 Required Minimum Distribution (RMD). An alternative is to directly transfer the amount of the RMD to a qualifying charity.
Since your RMD is considered taxable income, both options offer the possibility of saving you money in April and should be discussed with a financial professional.
When it comes to financial planning and wealth management, there is no one-size-fits-all plan. The best strategy is a personalized one, based on a comprehensive analysis of all the variables that affect your financial health.
At BLS, we are trained to help you navigate these uncertain times. Campaign proposals are just proposals and could look materially different depending on the legislative process.
* Tax-loss harvesting is the selling of securities at a loss to offset a capital gains tax liability. This strategy is typically employed to limit the recognition of short-term capital gains. Short-term capital gains are generally taxed at a higher federal income tax rate than long-term capital gains.
Securities and investment advisory services offered through qualified registered representatives of MML Investors Services, LLC. Member SIPC. www.SIPC.org. Bienenfeld, Lasek and Starr, LLC and BLS Wealth Management are not a subsidiaries or affiliates of MML Investors Services, LLC, or its affiliated companies. 1000 Corporate Drive, Suite 700, Fort Lauderdale, FL 33334, 954-938-8800. Any discussion of taxes is for general information purposes only, does not purport to be complete or cover every situation, and should not be construed as legal, tax or accounting advice. Clients should confer with their qualified legal, tax and accounting advisors as appropriate. CRN202211-274729
