Planning Ahead, Part 1

October 7, 2020 - Published by IAG Wealth Partners

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We are now under one month until Election Day 2020, and it appears increasingly likely that the Democratic Party has a greater than 50% chance to control the U.S. House of Representatives, U.S. Senate, and the Presidency starting in January 2021.

As we learned in 2016, the pollsters and pundits are far from perfect. If the electorate that actually votes by November 3 is significantly different from the population they are polling, the results could vary widely.

However, given the way the winds appear to be blowing, our passion for planning ahead is starting to kick in, and we have begun to ask ourselves how a Democratic sweep could potentially impact our clients. Over the next two weeks we will provide our best guess at what the future could look like if the current political winds continue blowing from the same direction along with some actions you may wish to consider depending on your personal circumstances.

Itemized deduction potential impact: In 2017 Congress capped taxpayers’ State and Local Tax (SALT) itemized deduction at $10,000 and also substantially increased the standard deduction. Restoring the SALT tax deduction is a significant priority for Democratic legislators. Former Vice President Biden has also proposed capping the value of itemized deductions at 28% which means higher-income taxpayers would receive less benefit for their itemized deductions.

Actions to consider: If you will not be itemizing deductions in 2020 (or have already paid at least $10,000 in state and local taxes), you may wish to consider postponing paying your property taxes and any additional state estimated income tax payments until 2021 when they could potentially be deductible again.

If you will be itemizing deductions in 2020 and will be in one of the top three federal tax brackets, you may wish to consider accelerating your deductions into 2020 to avoid a potential 28% cap.

Capital gains taxes potential impact. Currently when you sell a taxable asset, short-term capital gains (assets held one year or less) are taxed at a taxpayer’s federal income tax rate (0% to 37%). Long-term capital gains (assets held more than 1 year) are taxed at special long-term capital gain rates that range from 0% in the lowest tax brackets to 20% for taxpayers making over $496,000 (married filing jointly (MFJ)). Additionally, taxpayers making over $250,000 (MJF) must pay a net investment income tax of 3.8%. Former Vice President Biden’s proposal would not impact most of our clients, but it would increase the long-term capital gains tax rate to 39.6% (plus the 3.8%) for taxpayers earning over $1,000,000.

Actions to consider: For many taxpayers, earning over $1 million is a once-in-a-lifetime event. We often see clients who sell a small business or a piece of appreciated real estate in one year and then return to a lower tax bracket for the rest of their lives. If you are in the process of finalizing a once-in-a-lifetime taxable event you may wish to close your deal before December 31 to lock in today’s capital gains tax rates. If this proposal becomes law it will be more important than ever to carefully structure long-term capital gain events to avoid losing an additional 20% of your gains to federal taxes.

As with any campaign proposals, these provisions could be abandoned or changed significantly in the coming months. We are simply highlighting planning opportunities that could present themselves before the end of this year. Please be sure to consult with your personal tax professional before making any tax-related decisions.

Next week we will take a closer look how potential federal income tax, payroll tax, and estate tax changes could impact you and your family.


Quote of the week: John Scully: “The future belongs to those who see possibilities before they become obvious.”


Securities offered through LPL Financial. Member FINRA/SIPC. Investment advice offered through IAG Wealth Partners, LLC, (IAG) a registered investment advisor and separate entity from LPL Financial.

Any opinions are those of IAG and not necessarily those of LPL Financial. Expressions of opinion are as of this date and are subject to change without notice. This information is not intended as a solicitation or an offer to buy or sell any security referred to herein. No strategy assures success or protects against loss. Investing involves risk including loss of principal.

This Photo by Unknown Author is licensed under CC BY-SA

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