Year-End Tax Planning


Following a tumultuous start to the year, there are several factors that may influence key year-end tax and charitable planning decisions. The pandemic continues to impact the economy, and the upcoming election may result in significant changes to the income tax and the estate and gift tax regimes. State and local governments are facing unprecedented budget crises that could lead to new or larger tax burdens.

“The importance of 2020 and 2021 tax and charitable planning discussions with all of our business and individual clients, commencing after the election outcome is known, will be more important than ever,” said David Gold, Treasurer of the Board of Directors of the Jewish Federation of Greater Philadelphia.

While the election results will greatly impact future tax policy, regardless of the outcome, the economy will likely still be in a recession. It will be even more difficult to raise sufficient revenue to support government spending including key social safety net programs such as Social Security, Medicare and Medicaid.

Differing tax agendas could bring significant changes: The Trump tax plan for the second term revolves around making permanent several key provisions of the Tax Cuts and Jobs Act (TCJA) of 2017 as well as a potential cut in the tax rate on capital gains and dividends. The Biden tax agenda may reimpose a top income tax rate of 39.6% above $400,000 and taxing capital gains and dividends at ordinary income tax rates for those taxpayers with incomes over $1 million.

Key considerations for year-end decisions:

Tax rates: The prospect of increased tax rates in 2021 could lead some to second-guess the typical planning mantra of “deferring income and accelerating deductions” to reduce the current year’s tax bill. Effective tax rates and the value of deductions may be worth more in 2021 if Congress does impose a tax increase next year. However, recently enacted tax legislation, as well as some other long-standing planning techniques, could be beneficial in 2020.

Planning idea: The CARES Act, enacted to provide COVID-19 relief, enables the current deduction of up to 100% of adjusted gross income for cash gifts to charity (other than donor-advised funds, supporting organizations, and private foundations). Individuals considering large cash donations may find this beneficial. The IRA charitable rollover remains an attractive alternative to those over age 70½ who may not otherwise be able to itemize their deductions and claim a tax benefit from a charitable contribution. Congress has suspended the pension rules imposing “required minimum distributions,” but rollover contributions to qualified charities could still make sense for some.

Taxes on capital gains could rise dramatically: Under Biden’s plan, taxes on capital gains could almost double to 39.6% for taxpayers earning more than $1 million.

Planning idea: Clients with appreciated assets may want to consider selling before year’s end to lock in more favorable tax rates or consider donating those appreciated assets to charity to take advantage of the larger deduction based on the fair market value of the asset at the contribution date rather than selling the asset, paying capital gains taxes that might be due and then contributing the proceeds.

Estate taxes are likely to increase: Under the TCJA, Trump increased the gift and estate tax exemption from $5 million to $10 million with inflation adjustments, bringing that amount to $11.58 million for this year. Individuals can gift up to this amount without paying tax during their lifetime. Anything remaining can be used to offset estate taxes at death. Biden has mentioned plans to reduce the gift and estate exemption to a level closer to pre-TCJA amounts of $5 million.

Planning idea: Consider gift transactions before year-end in order to take advantage of the higher exemption amount and remove future appreciation from the estate. A number of estate planning techniques can be utilized, including transferring assets to charities now through charitable lead annuity trusts.

Cost basis step-up of bequeathed assets may be eliminated: Under current law, heirs receive appreciated assets with a step-up in basis to fair market value at the time of death. The Biden plan proposes to eliminate this rule, making transfers at death taxable. This “taxable recognition event” would occur even if the beneficiaries do not sell the asset.

Planning ideas: Gifts at death to charity would be exempt from the Biden plan tax changes. However, donors who are considering making such gifts may wish to accelerate these transfers in order to provide significant support to charities now, as many charities face increased costs and potential decreases in fundraising during the pandemic.

In the event that Biden wins the election, it may make sense to consider shifting certain assets, especially those likely to continue to appreciate in value to others in lower tax brackets such as younger generations and potentially defer capital gains taxes that might otherwise need to be triggered.

Endowment professionals at the Jewish Federation of Greater Philadelphia remain available to work with you and your other professional advisors to maximize the benefits of these and other tax planning strategies for you and the Jewish community. For more information, contact Jennifer Brier, Interim Director, Planned Giving and Endowments, or 215-832-0528.

Content is for informational purposes only and should not be construed as legal, tax or financial advice. When considering gift planning strategies, always consult with your own legal and tax advisers.


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