Opinion - Personal Finance

Op-ed: Here are some smart tax moves you will want to make in a Biden presidency

Key Points
  • Some polls suggest former Vice President Joe Biden will unseat President Donald Trump in the November election.
  • Planning ahead is key, as there are many changes that could impact your personal income taxes, investment decisions, gifting to heirs and business moves in 2020 if a new administration is in the works.
  • As for corporate taxes, Biden proposes raising the top tax rate to 28% from the current 21%.
Democratic presidential candidate former Vice President Joe Biden speaks at an Aug. 31 campaign event in Pittsburgh, Pennsylvania.
Alex Wong | Getty Images News | Getty Images

Presidential candidate Joe Biden's solution to getting the U.S. out of the coronavirus-induced economic mess is to increase taxes on the wealthiest Americans and corporations. The tax code will inevitably be one of the critical engines needed for the nation to start digging itself out of its current fiscal challenges.

Biden released a 110-page policy document in July, giving Americans a preview of what they can expect if the White House turns blue.

It's obviously difficult to do tax planning, especially in an election. Depending on which party wins control of the White House, the Senate, and the House of Representatives in November, the impact on your taxes could be huge.

Of course, whether any of Biden's plans are signed into law will also depend on the makeup of Congress after the November election. Many polls suggest that Biden will unseat President Donald Trump, increasing the likelihood of at least some of these proposals being enacted. Planning ahead is key, as there are many changes that could impact your personal income taxes, investment decisions, gifting to heirs and business moves in 2020.

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Individual income taxes, Social Security payroll taxes

Biden proposes to increase taxes on the wealthy, and those with yearly incomes above $400,000 would see their ordinary income tax rates in the top bracket increase from 37% to 39.6%.

To shore up the Social Security system, Biden's plan proposes that taxpayers with incomes of more than $400,000 be required to pay Social Security taxes on their income below $137,700, as well as their compensation above $400,000. Currently, only $137,700 in wages are subject to this tax, which is 6.2%. Employers are required to pay another 6.2%. In Biden's plan, those who are self-employed will carry the entire 12.4% themselves.

The tax game plan

What does this mean from a financial-planning and strategy perspective? If you earn more than $400,000 per year, and can move up some of your expected income for 2021 to 2020, you may save tens of thousands of dollars in taxes. Those who receive bonuses and have an income above $400,000 would be wise to have them paid out before the New Year, to save on ordinary income taxes and social security taxes.

Joe Biden: We will overcome this season of darkness in America
Joe Biden: We will overcome this season of darkness in America

If you have non-qualified stock options that produce ordinary income taxes when sold, you should sell in 2020. There are few reasons to hang on to them, unless you are confident that your employer's stock would skyrocket in value under a new administration. The prospect of higher tax brackets and the appeal of diversifying your investments away from employer stock is enough to convince many risk-averse employees to sell.

Avani Ramnani, a certified financial planner at Francis Financial with expertise in constructing evidence-based investment strategies, cautions investors that "tying up a large amount of your nest egg in a single stock is a recipe for increased risk and volatility. This is especially dangerous for employees who hold large amounts of their employer's stock, because they are already overexposed to their employer's financial health. They could be hit with a double whammy of losing their job and taking a hit on their company stock."

Capital gains

Capital gains are crucial to building wealth and are created when the value of the stock, bond or mutual fund that you purchase increases over time. With the significant market rally over the last decade, most Americans are sitting on substantial capital gains in their investment portfolios.

If you sell a stock less than one year from the date that you purchased it, you are subject to short-term capital gains, which get the same tax rate as ordinary income. Under Biden's plan, this could be as high as 39.6%.

You should only sell off investments and pay large capital gains taxes this year if you expect to cash in these assets in the coming years.
Avani Ramnani
certified financial planner with Francis Financial

A smarter tax move would normally be to hold your investment for longer than a year. The rates drop considerably, to 15% or 20%, depending on your income. In 2020, the highest bracket of 20% hits single taxpayers earning $441,451 ($496,601 for those filing married-filing-jointly).

However, Biden's plan recommends that those taxpayers with more than $1 million pay higher ordinary income tax rates, even on their long-term capital gains. This move effectively raises the capital gains tax rates to 39.6% from 20%, nearly doubling the tax bite for those high earners.

The tax game plan

To save on taxes from capital gains, investors need to time gains and losses. Savvy investors will speed up the recognition of long-term capital gains and sell assets in 2020 so they can take advantage of the lower rate now. However, selling your entire portfolio is not wise.

"You should only sell off investments and pay large capital gains taxes this year if you expect to cash in these assets in the coming years," Ramnani said. "This might be true if you plan on purchasing a home or making another large purchase. There is no done deal yet on this tax plan and a lot could change between now and November, as well as after the election."

Under the Biden plan, tax-loss harvesting strategies are even more valuable. Tax-loss harvesting is a sophisticated technique used to get more value from your investments and reduce taxes owed on capital gains. Temporary dips in the value of your investments, due to a decline in the market, can become a tax-savings opportunity if you sell securities at a loss to offset security sales with gains. If done correctly, this strategy can wipe out any capital gains tax liability.

Estate planning

RichLegg | E+ | Getty Images

Currently, when a person dies and leaves property to an heir, the basis of that property is increased to its market value as of the decedent's date of death. This provision allows the family to enjoy the increase in value of the asset, but not have to pay capital gains taxes. Biden proposes closing this tax loophole.

In the former vice president's tax plan, heirs would no longer be allowed benefit from this step up in basis and instead would have to use the value the asset had when purchased for calculating taxes. Under the new plan, an asset that was initially bought for $1 million, and then valued at $5 million when inherited, would create a tax burden on the $4 million gain.

The wealthy are also particularly concerned with the possible repeal of the Tax Cuts and Jobs Act's Estate and Gift Tax exemption of $11.58 million per person for 2020. Now, you can dip into your $11 million-plus to give gifts during your lifetime or pass on assets at death. Biden proposes knocking this down to the 2017 level of $5.49 million, adjusted for inflation. Any amounts above this lower exemption amount could be subject to a 40% estate and gift tax.

The tax game plan

High-net-worth people are thinking about how they can get assets out of their estate before the laws are overhauled. Suzanne Thau, an estate planning attorney with Schwartz Sladkus Reich Greenberg Atlas LLP, advises that "if you have an estate valued above $3.5 million, it is time to reach out to your estate-planning attorney to review your documents."

The prospect of a lower exemption ceiling combined with record low interest rates makes accelerating gifting programs and repositioning assets key, she explains.

"If you have been sitting on valuable real estate or business interests that are likely to appreciate, now is the time to consider gifting strategies like grantor retained annuity trusts or charitable trusts," Thau said. "You may not get another chance.

"Appraisers are already seeing a serious uptick in demand, and if you wait too long, the gift transaction, which can easily take over a month, may not be completed before a Democratic Congress closes the window of opportunity."

In summary, Thau said, "we've seen substantial demand for estate planning throughout the normally slow summer months and expect a ramped-up fall reminiscent of 2010 levels, when the estate tax was briefly repealed."

Some financial advisors recommend that their clients stand pat with their estate plan until they see the election outcome.

"Don't let the tax tail wag the dog," advises Paul Stagias, a CFP with Francis Financial.  "While tax savings are extremely important, taxes should not be the sole reason to gift money to family members.

"There are many factors that should play into this equation, including whether giving these assets away could leave you financially vulnerable," he explains."Even if you have significant assets to spare, giving family members money without a thoughtful plan could leave them ill-prepared to manage it."

A recent Bureau of Labor Statistics study supports Stagias and indicates that 33% of people who receive an inheritance have negative savings within three years.

Corporate taxes

As for corporate taxes, Biden proposes raising the top tax rate to 28% from the current 21%. He has also called for a 15% minimum tax on large corporations with $100 million or more in annual net income. If you are a small-business owner, you may want to accelerate as much income and capital gains from your company into 2020 to take advantage of the current, more favorable taxation policies.

—By Stacy Francis, president and CEO of Francis Financial