WHILE we advocated accelerating deductions and postponing income in prior year tax plans, we cannot apply these traditional tactics anymore. Both COVID and a change of the guards at the White House dictate that we alter these strategies this year.
1. Georgia on our minds – Control of Senate
If Democrats win both Georgia Senate seats, they would be able to enact their tax platform. That means higher taxes for higher earning taxpayers. If Republicans win either of the Georgia Senate seats, they will be able to block Biden’s tax proposals.
Taxes will be higher but not as high.
2. This year is different
End-of-year strategies are a little different this year because 2020 was different. Filing season was extended to July 15, 2020, COVID-19 pandemic led to quarantines. Work from home became the norm. Freeways became free and wild life enjoyed being wild before the human species took over.
3. Traditional planning won’t work this year
The conventional year-end tax planning strategies won’t make sense this year. That old adage to defer income and accelerate deductions won’t work this year.
4. Accelerate income
Instead of using the tried and proven strategy to defer income into next year, do the opposite – accelerate bonus and sales this year. Baliktad. You may be in a lower tax bracket this year, courtesy of lower tax rates and unemployment.
5. Defer deductions
Where you typically accelerate paying deductible items in the current year, consider postponing deductions for next year when tax rates will be higher. Deductions will be more valuable then.
6. Capital gains
President-elect Biden has proposed raising the capital gain rate from 20% to 39.6% for high earners. Consider selling in 2020 instead of 2021.
7. Required Minimum Distribution (RMD)
RMD is suspended for 2020. Is this a good thing for you and me? Probably not. There’s a decent chance that you’re in a lower tax bracket this year, so why not take that RMD this year? Why postpone it to next year when tax rates will be higher?
8. Penalty for early distribution
The 10% Penalty for early distribution (under age 59½) is waived if you or your spouse or dependents were diagnosed with COVID-19 or if you experienced adverse financial consequences of quarantine, furlough, lay-off, reduction of work, inability to work due to lack of child care or reduced hours of operating your business.
9. Charitable donations
The Biden campaign platform would limit itemized deductions to 28% (currently 37%) tax benefit for high earners. So, if you plan to make a charitable donation, do it this year. Besides, you also have an extra $300 of cash donation deduction on top of standard deduction.
10. Estate tax
The Biden plan would reduce the gift and estate tax exemption to $3.5 million from the current $11.5 million. Consult your estate lawyer.
11. Step-up in basis of inherited assets
This is the most cruel proposal of the incoming administration. I helped my clients save hundreds of thousands of dollars in estate taxes by stepping up bases at time of death. This would destroy the holy grail of estate plans.
12.Retroactive Effective Date:
President-elect Biden’s proposed tax changes could be made retroactive to Jan. 1, 2021, even if passed toward the end of 2021. We hope not.
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Victor Santos Sy graduated Cum Laude from UE with a BBA and from Indiana State University with an MBA. Vic worked with SyCip, Gorres, Velayo (SGV – Andersen Consulting) and Ernst & Young before establishing Sy Accountancy Corporation in Pasadena, California.
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He has 50 years of experience in defending taxpayers audited by the IRS, FTB, EDD, BOE and other governmental agencies. He is publishing a book on his expertise – “HOW TO AVOID OR SURVIVE IRS AUDITS.” Our readers may inquire about the book or email tax questions at [email protected].