Even in a year of unknowns, taxes are usually one thing you can count on. But in 2020, taxes also appear to be in flux: several incentives designed to ease the pandemic’s effects will expire at year-end, and a newly elected president has infused fresh uncertainty into the future landscape.

A New Tax Regime?

President-elect Biden’s campaign proposals contemplate several potential income and estate tax law changes for individual taxpayers. These include:

  • increasing income taxes for taxpayers with income over $400,000, including higher payroll taxes, limits on deductions, and raising rates to pre-2018 levels,
  • taxing capital gains and qualified dividends as ordinary income for taxpayers with income over $1 million, and
  • lowering the lifetime exclusion, which currently sits at $11.58 million, to “historical norms”—potentially closer to $3.5–$5 million

However, the president can only approve tax laws, not pass them. All roads to tax rate increases run through Congress. And at this point, control of the Senate is still up in the air. Currently, Republicans control 50 Senate seats while Democrats control 48—a January runoff in Georgia will determine the last two seats. If Congress remains divided, we don’t expect higher taxes in the near term. The next opportunity for a change of control will be in 2023, after the 2022 midterm elections.

Given the uncertainty, we recommend conventional year-end income tax strategies, including deferring taxes, for most taxpayers. There are a few exceptions: individuals with greater than $1 million in income who plan to sell an appreciated position or wish to make an allocation change in the near term should take action to crystallize their current tax rates. Otherwise, the six strategies highlighted below can help ease your tax burden. But don’t wait until the last minute—now is the time to determine which approach makes the most sense for you.

Have you maximized tax-deferred savings vehicles?

Typically, making the most of tax-deferred savings can make or break your long-term investment success. Contributing the highest amount will not only increase your savings but lower your taxable income, too (Display).

How Much Can You Contribute This Year?


Married couples filing jointly also enjoy another often overlooked option. A working spouse can make a full contribution to an IRA on behalf of a non-working spouse. The total contribution remains deductible, provided neither the IRA owner nor the spouse actively participates in an employer-sponsored retirement plan. Otherwise, the tax deductibility phases out at higher income levels.

Business owners seeking a larger tax deduction can also take advantage of the higher contribution limits for other retirement vehicles. For example, the IRS allows business owners to contribute the lesser of 25% of compensation, or $57,000 annually to SEP IRAs and defined contribution plans. Contribution limits on defined benefit plans, including Cash Balance pensions, can be even higher.

Did you take Required Minimum Distributions?

The CARES Act waived required minimum distributions (RMDs) for 2020, allowing additional tax deferral this year for those who can afford it. However, the Act did not become law until March 27, 2020, after some participants had already taken distributions. Later relief from the IRS (Notice 2020-51, issued in June) allowed taxpayers to return these distributions before August 31, 2020. So unlike other years, if you did not take your RMD yet this year, you can ignore it.

What’s the most tax-efficient way to make a charitable donation?

Donors can help themselves—while helping others—by making charitable contributions in the most tax-efficient way possible. In most cases, that means donating appreciated securities rather than giving cash. But this year, cash may be king. That’s because of a special provision in the CARES Act.

The CARES Act offers tax incentives for cash contributions made to a public charity. For instance, whereas deductions on cash gifts had previously been limited to 60% of adjusted gross income (AGI), now donors who itemize can deduct up to 100% of taxable income through the end of the year.* This benefit only applies to cash donations; the CARES Act does not amend the tax deduction for gifts of appreciated securities to public charities (where the deduction still stands at 30% of AGI), donor-advised funds (DAF), private foundations, or supporting organizations. And it disappears come 2021.

What about donors who are taking the standard deduction?

Bunching multiple gifts into a single year can increase the tax benefit of charitable contributions in specific years. Donors who don’t want charities to receive their gifts all at once—or those who have unusually high income or gains this year—could fund a donor-advised fund.

Another attractive option for donors taking the standard deduction? Individuals over age 70½ can donate up to $100,000 from their IRA. But the gift must go directly to a charity, rather than to a DAF or private foundation.

Do you need to offset realized investment gains?

Equity markets have surged since 2009, and even after March’s steep fall, they’ve climbed higher still. As a result, many investors hold positions with large gains. Mutual funds are required to distribute realized capital gains and income as dividends, creating a taxable event for fund shareholders. Harvesting losses can offset some of these gains. Ordinary income can also be used to offset a net loss of up to $3,000.

Have you considered gifting to family?

The current annual gift tax exclusion rests at $15,000 per person ($30,000 per couple). And the gift and estate tax exclusion and the generation gifting transfer (GST) exemption currently stand at $11.58 million per person. Keep in mind, most taxpayer-favorable provisions of the Tax Cuts and Jobs Act of 2017 will sunset in 2026, including the aforementioned expanded exclusion.

In the current environment, leveraged strategies like loans, installment sales, or grantor retained annuity trusts (GRATs) seem preferable to outright gifts. That’s because many of the hurdle rates for wealth transfer vehicles hover at or near all-time lows. Since its establishment in the late 1980s, the 7520 rate has averaged approximately 5.0%. Today, the rate is only 0.60%.** What’s more, the rates used to calculate intrafamily loans and sales remain highly attractive. Plus, a loan or installment sale gives the grantor the option to forgive the debt and complete the gift if Congress reduces the exclusion amount in the future.

Tailored for your needs

Tax efficiency is an essential component of any wealth planning strategy. That means taking advantage of contribution limits and choosing the right vehicles, assets, and strategy. These are just a few of the things to think about—your financial advisor can help you devise a plan that’s just right for you before year-end.

Tara Thompson Popernik
Senior National Director, UHNW Services—Wealth Strategies Group
Christopher Clarkson
National Director, Planning | Foundation & Institutional Advisory

*Existing carryover rules still apply.

**December 2020 rate.

This blog is an excerpt from an article originally published in the Tax Management Estates, Gifts, and Trusts Journal, Vol. 44, No. 4, 07/11/2019. Copyright © 2019 by The Bureau of National Affairs, Inc. (800-372-1033) http://www.bna.com

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