“Tis impossible to be sure of anything but death and taxes.”
The Cobbler of Preston by Christopher Bullock (1716)
This old adage by Christopher Bullock is still true today, but there’s actually a third certain thing in life – fluctuating tax rates!
The past 50 years includes a roller coaster of increasing and decreasing tax rates depending on the budget needs of the country and the whims of the White House and Congress. Another major election upcoming in November, combined with plummeting state and federal revenue because of this year’s pandemic, could lead to higher tax rates in the near future.
Now is the time to start thinking about how to structure your finances around higher tax rates. Here are some potential issues you could encounter if tax rates are increased along with some helpful suggestions.
Estate Tax Problem: The federal estate tax rate for 2020 is 40% for the value of estate assets which exceeds $11,580,000 ($23,160,000 for a married couple). States and Feds may drastically lower the $11.58M ($23.16M) threshold to tax more of your wealth when you die. They may also increase the estate tax rate over the current 40%.
Solution: Create an estate plan or review your existing plan. Consider gifting money or securities to family, friends or a foundation during your lifetime. Individual gifts in 2020 of $15,000 or less ($30,000 for married couples) don’t count against the lifetime gift-giving limit.
Capital gains tax rate goes up. In 2020, the highest long-term capital gains tax rate is 23.8% (20% capital gains tax rate plus a 3.8% surtax as part of the Affordable Care Act.) In 2005, the highest rate was 15%. Congress could see the sales of long-term securities and other assets as a valuable source of tax revenue by eliminating this preferential tax rate and instead using the ordinary income tax rates (currently as high as 37%).
Solution: Actively manage investment profits using your gains against your losses. If you have any assets that have appreciated over time and intend to sell in the near future, consider trading in 2020 to avoid a potential increase in the capital gains tax rates.
Higher income taxes. Given the increased government spending during the pandemic without corresponding tax receipts, most experts forecast an increase in overall income tax rates.
Solution: An old standby in tax planning is shifting income and expenses. If you’re the owner of a private business, consider negotiating contracts with customers to move income from 2021 into 2020. On the expense side, try to do the opposite by pushing as many deductions as possible from 2020 into 2021. For example, you could wait until 2021 to make any major capital acquisitions. Finally, remember your tax-deferred accounts. If planned correctly, you may have time to pay income tax on accounts now and then move them into a tax-free Roth account.
The bottom line? Consider your situation now and create a tax strategy so that if or when tax rates go up, you will be as prepared as possible.
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The possibility of capital gains tax should be understood before selling your residence. Tax surprises here could be costly!
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