Post-Election Year-End Tax Planning

Published Tuesday, December 1, 2020

2020 continues to be a tumultuous year. Though Joe Biden is the president-elect, which party controls the Senate will not be clear until the Georgia runoff elections on Jan. 5. With narrower majorities in both houses, much of what the next administration hopes to accomplish may have to wait until after the elections in 2022.

Several additional factors can impact key tax and charitable planning decisions this year-end. While passage of the Biden administration’s tax program remains uncertain, it revolves around several important tax changes that are targeted to individuals with high incomes. The Biden plan contemplates re-imposing a top income tax rate of 39.6 percent above $400,000 and taxing capital gains and dividends at ordinary income tax rates for those with incomes over $1 million. In addition, the plan would cap the value of itemized deductions (including the charitable contribution deduction for those who itemize) at 28 percent. The estate tax rate might increase from 40 percent to 45 percent and the estate and gift tax exemption amount could be reduced to as low as $3.5 million (rates and amounts that were in place in 2009). Other significant estate tax changes such as the elimination of the stepped-up basis at death (or imposition of a tax on unrealized gain on a decedent’s final tax return) could also be part of a Biden plan.

We want all donors to the Youngstown Area Jewish Federation to consider the following key year-end decisions:

Consider deferring income and accelerating deductions where appropriate to reduce the current year’s tax bill.

The CARES Act enables the current deduction of up to 100 percent of adjusted gross income for cash gifts to charity (note that this does not apply to donor-advised funds). Individuals considering large cash donations may find this one-year expansion of the AGI limitation particularly beneficial.

The IRA charitable rollover remains an attractive alternative to those over age 70½ who may not otherwise be able to itemize their deductions and claim a tax benefit from a charitable contribution. Keep in mind Congress has suspended the pension rules which impose “required minimum distribution” requirements for 2020 in response to the COVID crisis, yet rollover contributions to qualified charities still could make sense for some.

Donating stock or other appreciated capital assets remains a best practice. You avoid capital gains tax on the appreciation, and you can qualify for a charitable contribution deduction for the full fair market value of the shares or other assets as of the date of contribution. With the current rally in the stock market, such assets could be prime candidates for donation at year-end.

Consider establishing a (or adding to an existing) donor-advised fund at the Federation and take advantage of an immediate charitable tax deduction and then recommend grants from the fund over time.

Ask about other charitable giving vehicles including a charitable lead trust, especially as interest rates remain low. A CLT is an irrevocable trust that benefits charity and the non-charitable beneficiaries such as family.

It may make sense to engage in certain wealth transfer or gift transactions before year-end to take advantage of the higher estate and gift exemption amount. There are a number of estate planning techniques that can be utilized including using gifts or sales of property expected to produce income or increase in value to remove existing or future wealth from the donor’s transfer tax base.

As with any significant tax and charitable planning, it is always advisable to carefully consider potential changes in the context of your complete financial profile and consult with your professional advisor before taking any action.

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