Should I Change My Tax Planning Before the Election?

Biden, Trump, McConnell, Pelosi, who will win? Does a “Blue Tide” really mean more taxes on you? And if there is a Democrat trifecta in the Administration and Congress, what are they going to do with taxes? Do you secretly want to see Chris Cuomo fight Tucker Carson in a steel cage match to determine the winner of the 5th Congressional District? What can you do to protect your assets now!??!


My take: Who knows, so do not rush to do anything dumb. Betting on who will win elections and basing tax planning on assuming what policies the not-yet-winners will follow has proven time-and-again to be a waste of brain power. Some of the worst tax savings strategies have been made by people rushing to make a decision before a general election, only to find that decision cost them a lot of money in legal fees, transferred funds in a way that limited control over them, and in the end was a knee-jerk decision that proved unnecessary or contrary to what they wanted to accomplish. Here are three potential tax savings mechanisms that are on the political chopping block that – sadly – you have little control over, and probably would not benefit by making a rushed decision anyway:


Non-Qualified IRA Conversion to a Roth IRA


This has been a handy trick used by upper-middle class income earners for years. People who have a retirement plan through work cannot also receive an income tax deduction on Traditional IRA contributions, but they can invest money in a non-deductible IRA and have it grow tax deferred (much like a non-qualified annuity). So, people have been contributing to these IRAs then converting them to a Roth IRA income tax free. Thereafter, these funds grow tax deferred and may be withdrawn income tax free in the future, with the added benefit that the account owner does not even need to take required minimum distributions if he does not want to.


Say what you will about his choice of hair coloring: The Trump tax plan locked in this awesome tax savings strategy. But while it is currently super-helpful to those people who use it (a bit of a pain in the neck transferring funds to one account to another account within days, then having to have your accountant make the numbers not look like an ancient Grecian riddle on your income tax return), it is not a big-ticket item (the maximum you can convert is between $6,000 and $7,500 per year). This is an obscure enough trick that it is easy for a tax-hungry Congress to get rid of without too much fuss from taxpayers, and it’s not likely you can protect yourself by planning ahead since this type of legislation can be passed in December of 2021 and nullify the contributions you made as early as January of 2021. The most you can do is plan to make your final tax-free Roth conversion before the end of this year and cross your fingers this trick slides under Congress’s radar screen a little longer.


Trump’s Huge Estate Tax Deduction


Yes, if your family is worth over $23 million this might be a good time to lock in gift and estate tax savings by gifting this amount of money to your children or an irrevocable trust created for their benefit. That way you can avoid them needing to pay estate taxes on these funds if you wait to leave them to your children after 2025.


Remember that this estate tax deduction automatically halves at the end of 2025, and it is pretty rare that Congress goes out of its way to raise taxes immediately after an election, especially when the tax break will take care of itself in a few years. Also, with the increasing financial affluence of liberal voters, this tax strategy likely affects more registered Democrats than Republicans (imagine that turn of events!). Plus, if you had $30 million in your name, are you sure you are ready to gift the vast majority of your money to a trust for your children without having full control over the trust? If you haven’t already gifted these funds, consider waiting for legislation to pass that specifically targets the Trump estate tax cuts – or wait until 2025 to make the transfer – instead of rushing to give up control of a huge chunk of your net worth.


Step-Up of Cost Basis at Death


You know that Amazon stock you bought 20 years ago that has a cost basis of $3 per share? If Jeff Bezos sells that now he will face HUGE capital gains taxes. However, if he punts on selling the stock until after he dies, his cost basis increases to the stock’s value at the date of his death. This “step up in basis” at death has been the preferred strategy for megamillionaires to save a ton of money on capital gains taxes when they transfer their company stock to their children. It is also, however, how your mother’s home (which she bought for $50,000 in 1964) avoided a capital gains tax when it was sold (for $800,000 in 2020). So, while this tax break has helped uber-wealthy people for decades, it has also helped people with far less money save more-meager savings.


Sadly, there is not much you can do to lock in this strategy other than join your ancestors, and by that I mean die and die soon, since a Biden administration and Democrat Congress and Senate decision to limit or totally nix step up in basis rules doesn’t leave you any recourse: If you choose to gift highly appreciated assets to another person during your life that person receives the asset with your original basis, so gifting during your life is already not a suitable option. And it is likely any administration would ask that there be a limited step up in basis at death maintained for all taxpayers, so rank-and-file citizens get some type of step up. So, do not make a reflexive gift that may turn out to be worse than doing nothing.


Coming from a guy who gets paid to help people plan for saving money, I suggest you not rush to do any hasty tax planning. The election is still several days away, and just because one political party could be in charge of the presidency and both houses of Congress does not mean they will be willing to make sweeping changes to tax laws.

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