- Major changes could be ahead for the tax code if Democrats take the White House, maintain the House and scoop up a majority in the Senate.
- Income taxes and estate taxes could rise for the wealthiest households.
- There are a few steps you can take to help mitigate the tax bite.
A "blue wave" of Democrat victories in elections next month could upend the normal incentives for tax planning this year.
Typically, taxpayers look to defer income and accelerate expenses; they'd rather pay taxes later than earlier.
However, if former vice president Joe Biden wins the White House, and if the Democrats win both houses of Congress, tax rates may rise across a range of income sources for wealthier Americans.
It may be better to settle with the taxman this year than next.
"We're probably at the valley of low tax rates from a corporate, individual and estate and gift perspective," said Ryan Losi, a CPA with accounting firm Piascik.
"We've spent the last 30 years cutting tax rates and I expect to see them go up from here," he said. "It's a matter of how soon."
Be cautious as you weigh tax savings strategies.
"With the election outcomes and potential tax changes uncertain, it's not a great idea to make major structural changes that can't be undone," said Jonathan Traub, managing principal of the Washington Tax Policy Group at Deloitte.
With that said, higher tax rates are almost certainly coming. There are steps individuals can consider to reduce their overall tax burden going forward.
Individuals making less than $400,000 in annual income have nothing to worry about from a potential Democratic sweep in Washington, according to Biden's tax proposals.
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They are likely to see tax relief in the form of increased credits for dependent care, retirement saving and more.
A Biden victory, however, will likely mean higher taxes for wealthy Americans. Here are some of his key proposals:
- Increase the highest marginal tax rate back up to 39.6% from the current 37% passed as part of President Donald Trump's Tax Cuts and Jobs Act.
- Cap the tax benefit of itemized deductions at 28% of their value.
- Tax capital gains at the highest marginal tax rate (39.6%) for individuals with income of more than $1 million. For now, capital gains are taxed at 20% for single filers making more than $441,451.
- Reduce the amount that wealthy people can give to heirs free of gift and estate taxes. Currently, this so-called gift and estate tax exemption is $11.58 million per person.
The goal for taxpayers, Traub said, should be to find ways to accelerate income into this year and defer expenses to next without leaving them any worse if expected policy changes don't materialize in 2021.
Among potential moves to consider:
- Accelerate bonus payments to recognize on 2020 returns — something employers are usually open to.
- Exercise stock options this year.
- Wait until next year to make charitable donations. Be aware that a potential 28% cap on itemized deductions could negate the value of holding off on contributions, so discuss this issue with your CPA.
- Convert some or all of a traditional individual retirement account to a Roth individual retirement account. You'll pay tax on the conversion, but at this year's lower rate.
The conversion would have been ideal earlier this year after the 30% drop in the stock market, but it still may make sense.
"If you've been considering a Roth conversion, this is the year to do it, if Biden wins," said Losi.
Biden has proposed raising the top long-term capital gains rate to 39.6% from the current 20% for taxpayers with more than $1 million in income.
The long-term capital gains rate applies if you've held an asset for more than a year prior to selling it.
If the former vice president pairs this change with a mark-to-market rule that taxes unrealized gains, it will be particularly onerous, experts said. A Biden win could prompt many investors to sell their holdings this year.
"I expect to be doing a ton of work for clients taking unrealized capital gains this year," said Losi.
Taking gains on more liquid investments like stocks could save investors huge sums in taxes.
That's because the taxes you pay on capital gains are based on the difference between your cost basis -- what you paid for the asset — and its appreciation at sale.
If you like the investment, you can sell it, pay taxes on gains this year at a favorable rate and then repurchase the asset.
Once you buy the asset back at a higher price, you will have reset your cost basis.
Work with your accountant to ensure this strategy makes sense for your situation.
"There is no wash-sale rule for capital gains," said Dustin Stamper, managing director of Grant Thornton's Washington National Tax Office in Washington, D.C. "You can pay the taxes on the gains now and reset your tax cost basis [to current market prices]."
Possibly the best place to act if you anticipate a blue wave next month is in the realm of estate and gift taxes.
Biden is expected to cut the $11.58 million exemption from estate taxes by at least half, and raise rates on the taxable portion of estates to "historic norms."
"The exemption is at an all-time high and rates are at an all-time low," Stamper said.
He recommends that clients consider gifting assets to heirs now to reduce their taxable estates down the road, as long as they have plenty of assets for their own retirement.
There's no guarantee that an overhaul to the tax code is around the corner, but it doesn't hurt to be prepared.
"Don't uproot your plans, but be nimble," said Traub. "If there is a blue wave, understand what you can do to be in the best position."