Taxes are a big focus among Democrats hoping to win the race for the White House in 2020, and financial planners are already taking their proposals into account when devising strategies for this tax season.
While the Trump administration cut taxes – the Tax Cuts and Jobs Act not only reduced rates on the individual side, but also implemented a number of favorable measures for businesses – Democratic hopefuls have put forth a number of proposals to raise and/or expand taxes.
On the flip side, Trump is promising another middle-class tax cut if he is reelected, details of which the administration is expected to unveil by September.
Given the uncertainty, taxpayers won’t have an idea of what might happen to rates in 2021 until after the November election – but there are some steps tax planners say individuals can take this year to make sure they reap the full benefit of rates while they are low.
Traditionally, tax strategy favors taking a deduction now and paying the taxes later. However, Ryan L. Losi, executive vice president of Piascik, told FOX Business that it may be worthwhile to think about flipping that technique on its head, adding that he believes there will be “tremendous” pressure moving forward to raise rates – particularly on the individual side.
That strategy can apply to things like capital gains for those who may have benefited from a run-up in asset values, or to those who may have sold a business.
“Why defer in a low-rate environment and basically end up paying more tax on the deferred gains?” Losi said.
Steve Grove, tax managing director at financial services firm CBIZ MHM, noted that planning strategies will be based on expectations of future rates, but agreed with Losi that if there are going to be higher rates next year, it is better to accelerate income to pay taxes this year, at a lower rate, and delay deductions.
For the rank-and-file taxpayer, Grove noted there isn’t much planning to be done. They can, however, time out charitable contributions depending on whether they will take the standard deduction. Some people may also have the ability to control things, like when they receive their bonus.
Another area where individuals can potentially save themselves some cash is estate planning.
Under the Tax Cuts and Jobs Act, the estate tax exemption was raised to $10 million from $5 million. After adjusting for inflation, the exclusion amount for 2019 is $11.4 million (double for married couples).
The IRS recently issued guidance that people will not lose the tax benefit on large gifts made between 2018 and 2025 – after which the exclusion level is set to decrease.
Given those two factors, Losi said individuals may want to look into setting up some type of irrevocable trust, based on his belief that the exemption will never be this high again. He cautions, however, that you will not be able to get that asset back once it is off your balance sheet, nor will you be able to borrow against it.
“Two spouses can put this away and get it out of the estate and basically save a couple million dollars each,” Losi said.
There are also a number of measures that business owners may want to take advantage of while they are available.
“For business owners, we have this tax rate structure that is so, so favorable right now,” Losi said.
The qualified business income deduction, for example, allows eligible businesses (operated as a sole proprietorship, partnership or S corporation) to deduct up to 20 percent of their qualified business income.
Businesses can also take advantage of bonus depreciation, which allows the deduction of up to 100 percent of depreciation in the year a qualifying property is placed – like computer software – in service.