The economic turmoil of 2020 has many worried about their savings. COVID-19 has lead to the second-highest unemployment rate in American history, with about one in five people collecting unemployment benefits. State governments are reportedly experiencing extreme budget problems, and the US GDP was down 32.9%, the largest quarterly drop since the Great Depression.
Many of these economic indicators are causing wealthy families to think carefully about how to protect their wealth. COVID-19 may cause the government to raise taxes to try to cover unemployment programs as well as the expenses that states are facing in the battle to contain the pandemic. The president has not yet revealed a tax plan for meeting rising government spending, but his opponent, Joe Biden, has released his strategy. Here’s what wealthy families need to know to protect their income and savings from higher taxes.
Biden’s Proposed Tax Policy
It’s impossible to know the outcome of November’s election, but Joe Biden has already released some details as to his proposed tax policy. The policy, which was formed by a task force coordinated with Bernie Sanders, is 110 pages long. Perhaps the biggest change Biden has proposed is to raise the top individual tax rate from 37% to 39.6%. Americans who earn more than $1 million would also experience a rise in long-term capital gains tax, to 39.6%, from 20%.
Biden’s policy proposes the following actions: Raise the highest tax rate on high-income taxpayers from 37% to 39.6%
- • Tax long-term capital gains and qualified dividends as income for taxpayers making over $1 million (at a rate of 39.6%).
- • “Step up in basis,” a tax break that allows beneficiaries who inherit assets to sell off those assets and pay little to no taxes, would be repealed.
- • Begin phasing out the Sec 199A pass-through deduction for households with taxable income in excess of $400,000.
- • Bring back the Pease Limit on itemized deductions. Note that in 2017, the final year in which the Pease Limit was applicable, the phase-out threshold was $261,500 for single filers and $313,800 for married taxpayers filing jointly.
- • The benefit for itemized deductions would be limited to 28%.
- • Bring back the 12.4% Social Security payroll tax once earnings reach $400,000. (Note that in 2020, this tax only applies to the first $137,700 of compensation. Employees and a company split the tax 50/50; self-employed individuals also pay into the program. Biden’s plan, if it were active this year, would apply the payroll tax to 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.)
“A guiding principle across our tax agenda is that the wealthiest Americans can shoulder more of the tax burden, including in particular by making investors pay the same tax rates as workers and bringing an end to expensive and unproductive tax loopholes,” said the text of the plan.
These changes have many Americans thinking ahead – and looking for ways to start saving on taxes now.
How to Prepare for Tax Increases
Remember: the presidential election is just one piece of the puzzle. Democrats would also have to control the House and the Senate to push these reforms through.
President Trump in a press briefing on August 10 proposed cutting the capital gains tax; his tax policies in the past have shown interest in protecting the wealthy. However, the IMF is recommending governments worldwide consider a “solidarity surcharge,” increasing taxes on “income, property and wealth” to protect the global economy. There may be higher taxes hitting wealthy families regardless of who wins the November election.
If you’re earning an income that places you in the crosshairs of this tax reform, there are some ways you can start to prepare ahead of time.
- 1. Take advantage of lower capital gains taxes in 2020 and sell appreciated stocks you have held for more than one year. If you wish to maintain a position in this stock, repurchase the equity immediately – wash sale rules don’t apply to gains.
- 2. Close any sale of real estate or rental property in 2020 to avoid the top capital gains rate tax rising to an ordinary income rate of 39.6%.
- 3. The self-employed and private business owners should look for ways to charge more income in 2020 and shift expenses to 2021 to avoid higher income tax rates in 2021.
- 4. Are you newly working from home? Some wealthy taxpayers are taking advantage of their new location independence to move to states with no income tax: Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. Others are relocating to a state with lower taxes.
Also to note: historically, Democrats have proposed dropping the lifetime state tax exclusion from $11.58 million (or, for married couples, $23.16 million) to $3 million. If you’re worried about your estate taxes, gift money to family members and other beneficiaries to utilize the current lifetime exemption and avoid paying an estate tax of 40%.
It’s also important to know that if you choose to change your tax residency, the process could take more than a year. Speak to your accountant before making that decision, as the formal process of changing your permanent residence isn’t as simple as buying a home elsewhere.
Every financial situation is different. If you’re not sure whether or not to sell off an asset, or if you’re looking for more ideas to improve your tax situation, speak to an expert at CPAservices.com who can help you understand what actions you can take in 2020 to avoid a bigger tax burden in the future.