It’s a tough year for year-end tax planning
Performing year-end tax planning this year is going to be “very, very difficult,” Bob Keebler, CPA/PFS, said in a Nov. 10 webcast sponsored by the AICPA’s Personal Financial Planning Section.
Advisers face the challenge of helping clients plan for 2021 while control of the Senate remains uncertain. The breakdown of seats in the Senate, and the fate of Democrats’ plans to raise taxes on wealthy taxpayers, likely will not be known until Georgia conducts a special election for its two senators on Jan. 5. The runoff is necessary because none of the candidates for either Senate seat garnered 50% of the vote, a threshold set by Georgia law.
If the Democrats win both Georgia Senate seats, the Senate will be divided 50-50, which would give Democrats control of the Senate because the vice president has the constitutional power to break ties. Through the reconciliation process, Democrats would be able to enact tax reforms President-elect Joe Biden proposed in his campaign platform. On the other hand, if the Republicans win either of the Georgia Senate seats, they will be able to block Biden’s tax proposals.
All other things being equal, the Democrats’ odds of winning both Georgia Senate seats is only 25%. “We all learned in probability and stats,” Keebler said in the AICPA webcast, that if you flip a coin twice, there’s a 25% chance of heads coming up both times. Keebler recommended teaching clients this basic principle of probability.
Even if a client doubts that the Democratic candidates will prevail in the longtime red state of Georgia (and thinks, for instance, that each has only 40% odds of winning), there is still a 16% chance of the Democrats winning both seats (0.4 × 0.4). That may be enough to drive a planning decision because, Keebler said, if the financial stakes are high, “most people just wouldn’t take that risk.”
“This is what you have to tell your clients. Do not make these decisions for them,” Keebler stressed. “Let them weigh the odds. Just lay out the facts and encourage them to go online and read more about this.”
In other words, while Democratic control of the Senate is unlikely, the possibility should not be overlooked in planning for 2021. Three important Biden tax proposals to be aware of involve capital gain tax, charitable giving, and estate tax, Keebler said.
Beginning with capital gain tax, Biden has proposed raising the capital gain rate from 20% to 39.6% for taxpayers with income over $1 million. Therefore, individuals who are planning to sell in 2021 should perhaps consider doing so in 2020 instead, because of the possibility that Democrats could win both Georgia Senate seats, Keebler said.
For instance, imagine that a father is selling a car dealership to his daughter for $10 million and has scheduled the deal to close on her 30th birthday, March 18. By moving up the transaction to December, he guarantees himself a 20% capital gain tax rate rather than the possibility of 39.6%.
To take another example, a partner of a CPA firm who is scheduled to retire in May might wish to say to her partners, “Hey, guys, do you want to buy my stock at the end of December?”
With respect to charitable donations, the Biden campaign platform would cap itemized deductions to a 28% tax benefit for those earning more than $400,000, compared to 37% currently. Thus, if your client is going to make the charitable donation anyway, it may make sense to do it this year, to protect against the possibility (even if small) that the new Congress will make donation deductions less favorable, Keebler said.
Think of it this way, Keebler said: “You give $100,000 to Children’s Hospital this year, you get a $37,000 benefit. You give $100,000 to Children’s Hospital next year, if this changes, you get a $28,000 benefit.” If you are planning to donate anyway, making the donation this year may be the safest thing to do, if you are in the highest tax bracket. “Don’t take the chance that you’ll only get a 28-cent benefit,” Keebler said.
With respect to the estate tax, the Biden plan would reduce the gift and estate tax exemption to $3.5 million from the current $11.58 million level. Thus, if your high-wealth client has a choice of whether to give away money in December 2020 or wait until later, it may make sense to consider doing it now to avoid being detrimentally affected by an estate tax change such as Biden has proposed, Keebler said.
Biden is also proposing to eliminate the at-death step-up in the basis of inherited assets.
On a separate point, Keebler noted that Biden’s proposed tax changes conceivably could be made retroactive to Jan. 1, 2021. All of this assumes, of course, that the Democrats control the Senate and can push through tax legislation. Keebler’s webcast also discussed Roth conversions and many other topics.
“The next 51 days [the number of days left in 2020] will certainly be an adventure for most of us,” Keebler said. Because the prospect of significant tax changes on the horizon remains unclear for now, “We’re all going to have to work very hard to take care of the clients that have entrusted us with giving them solid advice,” Keebler said.
—Dave Strausfeld, J.D., is a JofA senior editor. To comment on this article or suggest an idea for another article, contact him at David.Strausfeld@aicpa-cima.com.
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