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Plan Now for Potential Tax Changes

Jeremiah H. Barlow

JD, Head of Family Wealth Services


Although next April 15 might seem like a long a time away, right now is the prime opportunity do some strategic 2021 tax planning. And depending on election results, you may want to make changes to your tax strategy this year to lock in the current low rates and gains you have made.

Tax Preparation for 2021

Getting tax-ready for 2021

With all that the world has endured in 2020, it’s understandable that many people are longing for a fresh start on January 1, 2021. If you are looking for ways to greet the coming year with some added peace of mind, talk to your financial advisor now about opportunities to reduce your 2020 tax bill.

Along with recommending year-end adjustments to your portfolio, your local Mercer Advisors team can also help you assess how the outcome of the Nov. 3 general election might influence future policy and legislative changes in the federal tax code. Here are some potential moves to discuss with your advisor before flipping the calendar to 2021.


Proposed tax policy

Several proposals within Democratic presidential nominee Joe Biden’s fiscal platform—if enacted by Congress—would require high-earning individuals and married couples to pay more federal tax. Specifics include:

  • Raising the highest tax bracket from 37% to 39.6%, which would apply to people with annual taxable income above $400,000.
  • Repealing the Tax Cuts and Jobs Act of 2017, which would result in a lower standard deduction, remove the current limits on some types of itemized deductions, and restore personal exemptions.
  • Collecting an additional 6.2% Social Security tax on wages above $400,000 (currently, the 6.2% tax occurs on wages up to $137,700).
  • Increasing the capital gains tax rate, currently set at 20% maximum, to equal the ordinary income tax rate—in effect, 39.6%—for people with more than $1 million of income.
  • Rolling the estate tax back to 2009 levels, when the top rate was 45% and the exemption limit for single taxpayers was $3.5 million (compared with 40% and $11.58 million, respectively, today).
  • Providing a tax credit of up to 28% (instead of the current dollar-for-dollar tax deduction) on retirement plan contributions.

Although none of the above is guaranteed to happen, thinking ahead will allow you to move faster and more confidently down the road, if necessary. Here are five strategies for optimizing your 2020 tax situation.


#1. Tax bracket management

Given the favorable tax environment right now, you and your advisor might find advantages in “filling up” your current tax bracket with additional income that you can report in 2020. For example, consider:

  • Converting retirement funds to a Roth IRA. Since you pay income tax up-front on Roth IRA contributions—which then grow tax-free and also are not taxed when you withdraw from your account in retirement—a conversion could help you take advantage of today’s lower income tax rates and shield you from future income tax hikes.
  • Exercising stock options or other equity compensation. If you receive this type of benefit through your employer, selling your shares in 2020 under the currently low capital gains tax rate and within a lower tax bracket could benefit your overall situation.


#2. Itemized deduction timing

If the election outcome signals that current limits on itemized deductions are likely to be repealed next year, you might want to wait to incur or pay certain bills until 2021, if possible. Examples include property tax payments, real estate purchases, and non-urgent healthcare expenses. As always, check with your tax professional and do a projection to determine what makes the most sense in your particular case.

Congress created a big deduction opportunity for taxpayers in 2020 as part of the CARES Act. For any cash donations you make to 501(c)(3) public charities this year, you will be able to deduct the full amount—up to 100% of your adjusted gross income (AGI)—on your tax return. Previously, the deduction limit has been 60% of AGI. If you were to make a large charitable donation and do a Roth conversion this year, the tax liability for your Roth IRA contribution could potentially be reduced to zero.

The CARES Act also established a $300 above-the-line deduction for charitable contributions this year. What that means is, if you take the standard deduction on your 2020 tax return, you can also take a charitable deduction of up to $300.


#3. Gain harvesting

If any of the stocks in your portfolio grew considerably over the course of 2020—such as Apple, Amazon, Netflix, Tesla, and Google—strategically selling some of those shares before year end could benefit your overall tax situation in a number of ways.

You will be paying capital gains at today’s 15% rate (20% for income of at or above $496,601 for married filing jointly) rather than at a potentially higher rate in the future. In addition, if your ordinary income for 2020 is lower—because the CARES Act allowed you to opt out of taking a required minimum distribution from your IRA, or because you retired or were laid off this year—you might wind up with zero federal income tax due on those capital gains if you remain in the lower tax brackets of $40,000 for single or $80,000 for married filing jointly.

Your tax professional and financial advisor can help determine whether the timing is right for you to take those gains this year.


#4. Tax loss harvesting

In principle at least, investors want to avoid seeing pieces of their portfolio lose value if possible. When losses inevitably happen, though, you can use them to help offset taxes on your income and on gains elsewhere in your portfolio.

One way to do this is by working with your advisor to strategically sell investments, such as stock, when they decline. Then, by systematically reinvesting in the market as it starts to correct, you can harvest the previous losses in the form of tax deductions on future gains.


#5. Estate planning and gifting

Given the possibility that estate taxes could rise, and exemption amounts could fall in the next several years, now is an excellent time to look at options for moving assets out of your estate. However, you probably also want to keep some strings attached to those assets if the current laws don’t change. Here are a few paths to consider:

  • A spousal access trust. This enables you to reduce the taxable value of your estate while still giving your spouse access to the funds.
  • Irrevocable Trust with a promissory note. A note, otherwise referred to as a loan, is a way to gift assets out of your estate in exchange for an income stream from the assets gifted. If it appears that the estate tax laws may change, then you can relieve the loan, which will trigger the gift.
  • Disclaimer planning. This entails building language into a trust or other type of estate plan that allows you to defer final decisions about the disposition of your assets to a later point in time.
  • Trust protector. As part of setting up an irrevocable trust, you can appoint someone who is authorized to revise the trust in the future—such as adjusting the income streams or changing the beneficiaries.


Get started with your advisor

These strategies for the 2020 tax year each require advance planning in order to complete the necessary groundwork before January 1, 2021. Mercer Advisors has an integrated team of CPAs, tax attorneys, and other experts who can work alongside your local advisor to help lay out an approach that aligns with your overall financial plan.

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