2020 has been a year of uncertainty, affecting nearly every aspect of life: travel, schools, businesses, social gatherings, hospitals, places of worship, and more. Perhaps the greatest area of uncertainty is still looming: the 2020 presidential election.
Given the damaged economy and social ills around us, where should the country be headed? The two major parties answer this question very differently. While the GOP traditionally believes that privatization and lower taxes are key to stimulating the economy, the Democratic party believes that the key to fostering economic growth is through a progressive tax structure that reduces income inequality and makes healthcare, college education, and public benefits more accessible and affordable.
By reviewing the proposed policies of the two major parties we can gain a better understanding of how the outcome of this election may impact your finances—most likely in the areas of income taxes, healthcare, estate planning, Social Security, and higher education. Even after a candidate wins, however, keep in mind that the proposals below will likely undergo significant modifications if and when passed.
Current Policy Proposals
Below are the major policy proposals in the areas of income taxes and estate planning, where most of the changes may take place.
Democratic Proposal—Increases taxes for high earners and provides relief for lower income families by:
- Raising income taxes
- Rolls back the Tax Cuts and Jobs Act (TCJA) early by restoring the 39.6% top marginal bracket for incomes exceeding $400,000
- Raising investment taxes
- Eliminates capital gains and qualified dividend treatment for those earning over $1,000,000, while keeping the net investment income tax (3.8%)
- Capping deductions
- Caps itemized deductions at 28%, which reduces the benefit of itemizing for high-income individuals
- Eliminating QBI deductions
- Phases out the 20% pass-through qualified business income (QBI) deduction for incomes exceeding $400,000
- Providing tax breaks for lower income families
- Child tax credit (CTC) of $8,000 ($16,000 for two or more children) for incomes up to $125,000, with a phase out between $125,000 to $400,000
- Earned income tax credit (EITC) for all workers ages 65 and older, regardless of whether they have a qualifying dependent child
- $5,000 tax credit for family caregivers of individuals with physical or cognitive needs
- Refundable, advanceable tax credit of up to $15,000 for first-time homebuyers
- Renters tax credit to reduce rent and utilities to 30% of income for low-income families
Republican Proposal—Keeps taxes low by:
- Maintaining low taxes for high-income earners
- Extends the TCJA provisions currently set to sunset after 2025
- Reducing taxes for the middle class
- Lowers the 22% bracket to 15%
- Reducing rates for capital gains
- Indexes capital gain thresholds for inflation
- Lowers tax rates on capital gains
- Introduces possible capital gains tax holiday
Democratic Proposal—Increases taxes for wealth transfers at all income levels by:
- Taxing more wealth
- Lowers estate-tax exemptions, possibly down to previous levels (around $12,000,000 per couple, adjusted for inflation)
- Repealing the step-up in cost basis provision
- Eliminates the ability to readjust the value of an appreciated asset (such as stocks and real estate) after death to reduce tax burden, a common strategy for middle- and high-net-worth families
Republican Proposal—Preserves status quo by:
- Keeping high estate-tax exemptions
- Maintains exemption of $23,160,000 per couple in 2020
- Retaining the step-up in basis provision
- Minimizes beneficiary’s capital gains tax
How Can We Prepare Our Finances?
Focus on the long term. It’s hard to know which candidate will win or what legislation will ultimately pass. With so much uncertainty, be careful of taking actions that rely on a still undetermined future. Make choices that benefit your money in the long run, regardless of how this election unfolds. Here are a few proactive planning ideas to consider.
Review your estate plan and consider lifetime giving to children, grandchildren, and others. In recent years, the Republican party has leaned toward a more generous estate planning policy, which has led to our current historically high estate planning exemption ($23,160,000 per couple in 2020). A Democratic win could shift the laws around estate planning, reducing or even eliminating several planning strategies.
1. Update Your Estate Plan
Strategies to consider include the following:
- Intrafamily loans
- Lend money to family members at low interest rates
- Spousal Lifetime Access Trust (SLAT)
- Transfer assets to your spouse in trust to take advantage of the full gift exemption
- Dynasty Trust
- Ensure each inheriting generation receives income for life without owning the funds outright, allowing for asset protection as well as no estate tax inclusion
- Income strategies
- Consider an accumulation trust, Charitable Remainder Trust (CRT), or Irrevocable Life Insurance Trust (ILIT) to provide beneficiaries with regular income
- Upstream giving
- Give low-cost basis assets to older family members without a taxable estate to obtain a step-up in basis after their passing
- Estate freezing
- Freeze the value of assets at a given point in time; generally, the best technique is the Intentionally Defective Grantor Trust (IDGT)
- Charitable Lead Trust (CLT)
- Leave income first to charity for several years, with the remaining balance to family or other heirs
Regardless of who wins the White House, getting your affairs in order ensures your family is provided for and your wishes carried out. Key estate planning documents include a will, trust, power of attorney, advanced healthcare directive, and Health Insurance Portability and Accountability Act (HIPAA) authorization.
2. Accelerate Income in 2020
Accelerate income and recognize capital gains in 2020 to take advantage of low tax brackets. With earnings reduced for many workers and required minimum distributions waived for 2020, many taxpayers will owe less to Uncle Sam this year. Moreover, a change in tax rates from a new administration could take effect as soon as January 2021, so take advantage of this opportunity to make smart money moves for your future.
Consider a Roth IRA conversion, which will transfer your Traditional IRA or 401(k) into a retirement vehicle that grows tax-free with no mandatory withdrawals. Also, a portfolio rebalance that sells positions with long-term gains can better align your investments with your goals, especially important with the market volatility this year.
3. Itemize Deductions
Take advantage of itemized deductions while they are still available. One popular area is charitable giving. Donations to a donor-advised fund (DAF) give a current year deduction without transferring to the final charitable beneficiary right away. Also, as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, cash gifts made directly to charity are deductible up to 100% of your AGI for 2020 (up from 60%).
4. Increase Business Deductions
Entrepreneurs should consider taking more business deductions this year. Accelerate any QBI deductions as well as qualified dividends and taxable corporate events that may be taxed differently (or eliminated altogether) with a change in the White House.
5. Review Your Financial Plan
Evaluate your current financial plan to see how policy changes may impact your situation. This will give you peace of mind that you and your family are protected, regardless of what happens in Washington, D.C.
Make Your Voice Heard
Most importantly, when it comes to politics, avoid feeling stressed and overwhelmed by all the turmoil around us. This can be quite a challenge with the heated political debates and 24-hour news feed seeking to pull voters in different directions, so try to focus on what you can control. Whether by mail or in person, make sure your vote gets counted and your voice heard during this election.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Stratos Wealth Partners and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.
As required by the IRS, you are advised that any discussion of tax issues in this material is not intended or written to be used, and cannot be used, (a) to avoid penalties imposed under the Internal Revenue Code or (b) to promote, market or recommend to another party any transaction or matter addressed herein.