Around this time in a normal year, investor clients project tax liability for the current year and strategize for the next. A potentially seismic presidential race, however, is upending planning strategies.
“Typically, by late October/November we’re reviewing year-end planning … looking at capital gain and loss harvesting,” said Julia Carlson, founder and CEO of Financial Freedom Wealth Management Group in Newport, Ore. “We decide if a Roth conversion could make sense and review required minimum distributions and using qualified charitable distributions.”
But this is 2020. “Tried-and-true year-end planning involves deferring income and accelerating deductions. Where taxes may increase in 2021, the converse is true. Income is accelerated and deductions deferred,” said Bill Smith, Bethesda, Md.-based managing director for CBIZ MHM’s national tax office. “For example, where you might prepay a year of insurance to get the deduction, you would only pay the amount due and wait to pay the balance. If you anticipate a sale in the near future, you might change to the accrual method to accelerate income.”
Similarly, if it’s an option for clients in higher income tax brackets, accelerate income in 2020 to avoid potentially higher taxes next year, said Jane DeLashmutt O’Mara, portfolio manager at FBB Capital Partners in Bethesda, Md. “This year, you have an opportunity to benefit from charitable gifts up to 100% of your taxable income,” she added.
“It may make sense to delay other discretionary deductions such as charitable contributions until next year, as they’ll be worth more if taxes rise,” said Louis Sands, a CPA and partner at Sikich’s in Naperville, Ill. “This could also utilize the standard deduction and bunch more than one year’s contributions into 2021 if that makes sense” for a client.
A big question for planning this election year is, which way will taxes go?
Many taxpayers are considering last-minute lifetime gifting to family as well as other estate planning revisions to take advantage of the current lifetime exemption from estate tax ($11.58 million per taxpayer). “Estate tax, like income tax, could certainly be a target of a new president’s tax policy both through a reduction of this lifetime exemption … and through the elimination of the step-up in basis,” Sands said.
“All of our high-net-worth clients are exploring options to take advantage of the estate tax exemptions that were increased in 2017 and may change in 2021,” said Clay Stevens, director in strategic planning at wealth management firm Aspiriant. Several clients are also choosing not to make large year-end gifts even if they assume the law is changing, he added.
Clients looking to wait until after the election before gifting might have a problem: Delayed voting results could push the timeframe for a gifting decision too late in the year. “We’ve worked with clients on ways to transfer now without it being an immediate gift, such as selling the assets to a trust in exchange for a note and then forgiving the note late December if the law is likely to change,” Stevens said.
Another part of an investor’s year-end projection is reviewing capital gains and deciding if tax-loss harvesting should be considered to offset recognized gains, said Jim Brandenburg, CPA and partner in the Milwaukee office of Sikich. “Investors need to keep in mind the wash-sale rules that apply if the same stock is acquired 30 days before or after a stock is sold at a loss,” he said.
“We should be looking at tax-loss harvesting all year, but for many people it does start to be an end-of-year planning strategy,” said Jamie Hopkins, managing director at Carson Coaching and director of retirement research at Carson Group in Philadelphia.
And look at Roth conversions even in this year. “This year has been unique because a lot of Roth conversions made sense earlier in year due to changes in the [pandemic-relief acts] and the market drop,” Hopkins added. “But as our tax picture is a bit clearer towards end of year, it can be a great time to do bracket-bumping conversions.”
