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Wealthy Taxpayers May Want to Strategize for Potential Tax Increases



Article Highlights:

  • Skyrocketing Government Spending

  • Federal and State Deficits

  • Tax Increases in Our Future

  • Tax Strategies

The outcome of the November elections could have a significant impact on taxes for the wealthy. The COVID-19 pandemic has wreaked havoc on the economy, as the government’s tax revenues have declined while government spending has soared. Although the President has not revealed his tax policies for the future, the opposing November candidate, has, and that is why the wealthy are strategizing for potential increases.


Regardless of the November election, with rising deficits at the state and federal levels, government spending skyrocketing, and revenue dropping due to the COVID-19 pandemic, it is sure that taxes will go up in coming years, and the likely focus for generating this additional tax revenue is the wealthy.


Competing candidates has already said that the wealthy will be targeted and has proposed the following changes:

  • Return the statutory tax rates to what they were before the 2017 tax reform enacted in the Tax Cuts and Jobs Act (TCJA), which means for higher-income taxpayers, the top tax rate will increase from 37 to 39.6 percent.

  • Tax long-term capital gains and qualified dividends as ordinary income for taxpayers making over $1 million.

  • End the step-up in basis for inherited assets, which will result in increased taxes on beneficiaries when those assets are sold.

  • Phase out the Sec 199A pass-through deduction for households with taxable income in excess of $400,000.

  • Reinstate an overall limit (often referred to as the Pease limit) on itemized deductions. When itemized deductions are subject to the Pease limit, the itemized deductions begin to phase out when a taxpayer’s adjusted gross income (AGI) exceeds a threshold amount. In 2017, the last year the Pease limit was in effect, the phase-out threshold was $261,500 for single filers and $313,800 for married taxpayers filing jointly.

  • Limit the tax benefit of itemized deductions to 28%.

  • Resume the 12.4% Social Security payroll tax once earnings reach $400,000. Currently, for 2020, this tax only applies to the first $137,700 of compensation. Employees pay half and their employers pay half; self-employed individuals also pay into this program. The amount subject to this tax is inflation-adjusted each year. If the opposing candidate's plan were currently in effect, this payroll tax would apply for the first $137,700 of earnings and resume when a worker’s earnings reach $400,000, creating a gap between $137,700 and $400,000 in which this tax wouldn’t apply.


Some strategies higher-income taxpayers are contemplating in preparation for tax increases include:


1. Sell appreciated stocks that have been held for over one year to take advantage of the lower capital gains rates in 2020 as a hedge against not qualifying for the capital gains rates in the future. If a taxpayer wants to maintain a position in the stock, it can always be repurchased immediately, since wash sale rules only apply to losses, not gains.


2. If you are considering selling a rental property or other real estate that you’ve owned for over a year, it might be appropriate to close the sale in 2020, when the top capital gains tax rate is 20%, as a hedge against the gain being subject to the proposed ordinary income rates of 39.6%.


3. Although not mentioned by either presidential candidate, estate tax will be a likely target, and during the last election, the Democratic ticket proposed dropping the lifetime estate tax exclusion to $3 million. It is currently at $11.58 million ($23.16 million for couples). The wealthy should consider gifting money to family members and friends to utilize the current lifetime exemption and avoid the 40% estate tax. This could just be the motivation to give gifts that were already planned for the future.


4. If possible, wealthy owners of private businesses should look for ways to accelerate income into 2020 and shift expenses to 2021 to avoid potentially higher income tax rates in 2021.


5. As a result of the COVID-19 pandemic, many taxpayers have found they can do their work at home, and that shift in lifestyle combined with potentially higher state taxes has many people considering relocating to a state with no income tax. Taxes in states such as CA, NY and NJ are exceptionally high; CA, for example, is even considering reinstating a state estate tax.


Everyone’s circumstances are unique. Please call if you would like to review your tax situation to determine if there are actions you can take in 2020 to avoid the potentially higher federal and state taxes that could begin in 2021.

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