Depending on which party wins control of the White House, the Senate, and the House of Representatives in November, the ramifications for your taxes could be huge.
It’s therefore imperative to watch the election with your tax situation in mind. Once the results are in, you should be prepared to take prompt action in three areas that could see dramatic shifts no matter who emerges victorious.
1. Converting To A Roth IRA
Ever since the most recent set of tax rate reductions took effect during the 2018 tax year, Roth conversions have been favorable. Many retirement savers have much of their nest eggs set aside in traditional IRAs and 401(k) accounts, and they’ll have to pay taxes when they make withdrawals from those accounts in retirement. By then, it’s entirely possible that the income tax rates you’ll have to pay will be much higher. With the ability to lock in today’s tax rates of 10%, 12%, 22%, or 24% on taxable incomes up to $326,600 for joint filers in 2020, you have an opportunity to pay relative low taxes now on a in exchange for tax-free growth for the rest of your life in a Roth IRA.
If President Trump wins the election, then Americans can expect those rates to last through 2024. That’d make it easier to adopt a gradual conversion approach, doing partial conversions each year to keep your current taxable income low but still nail down tax-free future growth. However, if former Vice President Biden wins the election and Democrats make gains in Congress, it could threaten those low tax rates. In that case, front-ending more of a Roth conversion during 2020 would eliminate the risk of a tax hike in 2021 making the strategy less attractive.
2. Taking Profits On Stocks
Biden and other Democrats have advocated raising tax rates above the levels that Trump and Republicans passed into law nearly three years ago. The biggest difference, however, could be in treatment of long-term capital gains. For decades, tax laws have offered a lower tax burden on profits from the sale of investments held for longer than a year. If Biden wins the election, however, lawmakers might look seriously at eliminating that tax break for upper-income taxpayers. That could potentially nearly double the top capital gains tax rate.
Year-end tax planning often involves looking for losses to offset gains, and if Trump wins, that’s the strategy most people will want to follow. However, if it looks possible that capital gains rates will go up in 2021, selling off winners and paying lower tax rates now to avoid higher tax rates later could be a move worth looking at more closely.
3. Making Major Estate Planning Moves
Finally, tax reform dramatically increased the amount of money that people can pass to future generations without paying an estate tax. Under current law, estates of up to $11.58 million can escape federal estate tax under the lifetime exemption amount. However, some opponents of the increase in the exemption back in 2018 have sought to reduce the exemption back toward the $3.5 million that prevailed more than a decade ago.
If President Trump wins reelection, then any efforts to cut the estate tax exemption are likely to fail. However, a win for former Vice President Biden would open the door to more serious discussions. In response, wealthy individuals would want to consider substantial gifts before the end of 2020 as part fo their estate planning in order to lock in exemptions while they’re still available.
Keep Your Eyes On Washington
Taxpayers have a lot to worry about right now even without considering future tax changes. With such an important election coming up in less than three months, though, you owe it to yourself to keep tax planning in mind after voters go to the polls.
Source: Arizona Daily Sun