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Key Takeaways & Insights

Year-end tax planning has an added layer of complexity in 2020—weighing the known vs. the unknown. Do you take certain actions before December 31 to “lock in” under current tax laws? Or do you wait to see if President-elect Biden’s proposed tax policies are formally introduced and enacted into law? We’ve outlined a few key areas you may want to focus on to help with your year-end planning.

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  • Ultimately, your decision will depend on many factors particular to your tax situation such as your anticipated income and expenses for 2021.
  • If you think your tax rate might go up next year, look for ways to accelerate or defer your taxable income, including capital gains.
  • You should work closely with your advisor to understand what the 2021 political landscape could mean for your financial situation.

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Year-end tax planning has an added layer of complexity in 2020—weighing the known vs. the unknown. Do you take certain actions before December 31 to “lock in” under current tax laws? Or do you wait for the results of the run-off Senate races in January? (If Republicans retain control of the Senate, President-elect Biden may have difficulty enacting many of his proposed tax policies.)

There is no right or wrong answer. Your choice will ultimately depend on many factors particular to your tax situation, including your anticipated income and expenses for 2021, your outlook for the coming year, and your goals. It’s also not an all or none decision. You might decide to take certain steps now and wait on others.

To help you with your year-end tax planning, we’ve outlined a few key areas you may want to focus on. We encourage you to work closely with your Cerity Partners advisor to gain a deeper understanding of what the 2021 political landscape could mean for your financial situation. They can simulate different scenarios based on your unique circumstances to show the potential impact on your current and future tax liabilities.

Individual Income Tax Rates

The current top marginal tax rate is 37% for individuals earning more than $523,600 in 2021 ($628,300 married filing jointly). On the campaign trail, President-elect Biden discussed raising the top rate to 39.6% for anyone earning more than $400,000.

Planning Considerations

If you think your tax rate may go up in 2021, look for ways to accelerate your income (receive in 2020 instead of 2021) to reduce your taxable income for the coming year. For example, can your bonus be paid by December 31? Can you receive January royalties or rental income in December?

Self-employed business owners may have other avenues to accelerate their income and expenses. Additionally, if you are an employee, check to see if your employer offers a nonqualified deferred compensation plan and if you’re eligible to participate. Deferring income can help offset any potential increase in your tax rate.

Capital Gains Tax

The proposed 39.6% rate would also apply to capital gains and qualified dividends for individuals with more than $1 million in income. Currently, the maximum tax rate for capital gains is 20%.

Planning Considerations

Do you have any appreciated assets that you’ve been contemplating selling? Does it make sense to sell now, so you pay the capital gains tax in 2020? Do you have any carryover losses that would help offset the capital gains?

Estate and Gift Taxes

The lifetime estate-tax exemption is currently $11.58 million per person, and there’s a step-up in basis to fair market value of appreciated property at death. President-elect Biden has proposed lowering the lifetime exemption to $3.5 million – $5 million per person and eliminating the step-up in basis. It‘s worth noting the lifetime exemption is set to drop back to approximately $5 million (2017 level) at the end of 2025 if there are no tax law changes before then.

Planning Considerations

You can implement several planning strategies to reduce your taxable estate and take advantage of the more generous lifetime exemption, such as making gifts to certain types of trusts, making outright gifts to your loved ones, or creating Grantor Retained Annuity Trusts (GRATS). The IRS has stated it won’t “claw back” any of the exemption if you make a gift now, and the exemption amount drops in the future. For example, suppose an individual makes an $11.58 million gift in 2020 and dies in 2026. In that case, the exclusion used in calculating the unified gift and estate tax in 2026 would be $11.58 million, not $5 million, adjusted for inflation.

Charitable Deductions

The high standard deduction limit ($12,400 for 2020/$12,550 for 2021) and the $10,000 deduction limit for state and local taxes (SALT) have made claiming itemized deductions more challenging. As a result, many people have begun to “bunch” their charitable donations (aggregate multiple years of gifts into one year) to maximize their charitable deduction. But when should you bunch—2020, 2021, or not at all?

Planning Considerations

If you decide to accelerate your income, you may also want to “front load” your Donor Advised Fund or bunch your charitable gifts this year to help offset your higher taxable income. If you don’t accelerate and think your tax rate will be higher in 2021, you might hold off on your donations until next year to boost your deductions. Note: President-elect Biden has discussed limiting itemized deductions to 28% of adjusted gross income for individuals earning more than $400,000.

Depending on your gifting philosophy, you might also consider establishing a foundation, a charitable lead annuity trust (CLAT), or charitable remainder unitrust (CRUT). Perhaps the most important factor that will influence your decision is how much you can afford to give in any one year.

Retirement Planning

Deferring income is another strategy that can help you effectively navigate current tax laws and any potential changes. It pushes some of your tax liabilities down the road, giving you more time to plan.

Planning Considerations

Are you contributing the maximum amount to your employer’s 401(k) plan and your IRA, including catch-up contributions if eligible? If not, consider increasing your contributions from both your salary and any bonus. Do you have equity compensation that you can defer receiving? Business owners might also consider establishing a deferred compensation plan for their key employees.

Nothing is Certain

At first blush, it may seem obvious that you want to act now before President-elect Biden takes office. But taxpayers need to exercise caution and not make hasty decisions. Proposed policies are just that—proposals. There is no guarantee that any of them will become law. And if enacted, they could be in a modified form. You should look at all possible scenarios and evaluate which one aligns best with your goals and circumstances, and will help move your financial life forward.

We’re Here to Help

We recognize this information is a lot to absorb, especially considering everything else that is going on. Our in-house tax and planning professionals have extensive knowledge of tax laws and advanced-planning strategies. Contact us to discuss how we can help you reduce your 2020 tax liabilities and beyond.


Meet the Author

Sean Moore

Partner

Sean is a Partner in the New York office and has more than fifteen years of experience in finance, tax and related legal work. His relationships with clients include providing counseling corporate executives and high net worth individuals and families in tax, investments, insurance, company benefits, estate planning, and retirement planning.

Prior to joining Cerity Partners, Sean founded Dendron Advisors, a private wealth and advisory firm dedicated to servicing the needs of successful individuals and their families. Sean served as a Vice President of Financial Counseling for over nine years at the Ayco Company, a Goldman Sachs Company, where he provided full-service financial planning and was a trusted advisor to high net worth families. At the Ayco Company, he also previously held the post of Vice President of the National Sales and Marketing team.

Sean earned a Masters in Health Systems Management from Vanderbilt University, and a Masters of Business Administration and Juris Doctor from Seton Hall University. He holds life and annuity licenses.

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Steve Walker

Partner

He is a Partner in the Orange County office. He has more than thirty years of experience in tax and accounting, providing comprehensive tax planning, tax compliance, and transactional consulting services. He has served a variety of businesses throughout his career; however, his professional focus and technical expertise focus on entrepreneurial companies and high net worth individuals. Additionally, he has significant expertise in the real estate industry. Steve leads the Tax Practice and is a member of the Executive Committee.

Prior to joining Cerity Partners, Steve was the founder and managing partner of The Walker Company, LLP, a full-service tax and consulting firm located in Irvine, CA. The Walker Company was frequently hired as a consultant when business owners encountered situations where creative solutions were needed. Much of his career was spent in the Orange County offices of Kenneth Leventhal & Company. During his tenure at Kenneth Leventhal & Company, Steve functioned as a national resource in the areas of partnership taxation, troubled debt restructures and business entity structuring. He left Kenneth Leventhal & Company in 1994 to become the partner in charge of the tax practice of Haskell & White LLP, a large Southern California regional accounting firm.

Steve has a Bachelor of Science in Business Administration with a concentration in Accounting from the California Polytechnic State University at San Luis Obispo and is a member of the American Institute of Certified Public Accountants and the California Society of Certified Public Accountants.

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