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Wealthy Taxpayers May Want to Strategize for Potential Tax Increase


Article Highlights:

The outcome of the November elections could have a significant impact on taxes for the wealthy. The COVID-19 pandemic has wreaked havoc on the economy, as the government’s tax revenues have declined while government spending has soared. Although the President has not revealed his tax policies for the future, Joe Biden, his presumptive opponent in November, has, and that is why the wealthy are strategizing for potential increases.

Regardless of who wins the November election, with rising deficits at the state and federal levels, government spending skyrocketing, and revenue dropping due to the COVID-19 pandemic, it is sure that taxes will go up in coming years, and the likely focus for generating this additional tax revenue is the wealthy.

Biden has already said that the wealthy will be targeted and has proposed the following changes:

Some strategies higher-income taxpayers are contemplating in preparation for tax increases include: 

  1. Sell appreciated stocks that have been held for over one year to take advantage of the lower capital gains rates in 2020 as a hedge against not qualifying for the capital gains rates in the future. If a taxpayer wants to maintain a position in the stock, it can always be repurchased immediately, since wash sale rules only apply to losses, not gains. 
  2. If you are considering selling a rental property or other real estate that you’ve owned for over a year, it might be appropriate to close the sale in 2020, when the top capital gains tax rate is 20%, as a hedge against the gain being subject to the proposed ordinary income rates of 39.6%. 
  3. Although not mentioned by either presidential candidate, estate tax will be a likely target, and during the last election, the Democratic ticket proposed dropping the lifetime estate tax exclusion to $3 million. It is currently at $11.58 million ($23.16 million for couples). The wealthy should consider gifting money to family members and friends to utilize the current lifetime exemption and avoid the 40% estate tax. This could just be the motivation to give gifts that were already planned for the future. 
  4. If possible, wealthy owners of private businesses should look for ways to accelerate income into 2020 and shift expenses to 2021 to avoid potentially higher income tax rates in 2021. 
  5. As a result of the COVID-19 pandemic, many taxpayers have found they can do their work at home, and that shift in lifestyle combined with potentially higher state taxes has many people considering relocating to a state with no income tax. Taxes in states such as CA, NY and NJ are exceptionally high; CA, for example, is even considering reinstating a state estate tax. 

Everyone’s circumstances are unique. Please call if you would like to review your tax situation to determine if there are actions you can take in 2020 to avoid the potentially higher federal and state taxes that could begin in 2021.

Please note: Some material may be time-sensitive and may no longer apply.
Please contact us with any questions.
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