Cash basis taxpayers have a large number of ways to control their 2020 reported taxable income which is even more important this year since we may be moving from historically low tax rates to much higher rates post-2020.
While a Biden victory appears fairly certain, we find ourselves in the position of not knowing whether the Democrats or Republicans will be controlling the Senate. The two federal Senate seats in Georgia will not be determined until January leaving us with significant tax planning uncertainty. These seats are unsettled since neither candidate won over 50% of the votes cast. The Republicans just need one of these seats to control the Senate, while the Democrats must win both seats.
Senate control is critical to determining whether the Biden Administration will be able to push though their promised tax increases (see attached summary) including increasing ordinary tax rates (from 37% to 39.6%) and long-term capital gain rates (from 23.8% to 39.6%) for taxpayers with more than $400,000 and $1,000,000, respectively, of taxable income.
If tax rates do go up taxpayers will generally be better off accelerating taxable income into 2020 and deferring certain expenses into 2021 when those deductions may be more valuable.
We have seen this fact pattern a few times over the last few decades and following is a summary of some strategies to maximize flexibility and tax impact regardless of the outcome.
Here are 10 ways taxpayers can best position themselves to lower their overall taxes, regardless of which party ends up controlling the Senate.
- Accelerate capital gains by selling appreciated assets before year-end. These investments can be immediately re-purchased if you like the stock as a long-term hold.
- “Loss-Harvesting” involves working with your investment advisor to sell-off stocks or bonds with losses in order to net them with capital gains. You can repurchase the investments after 30 days, otherwise the “Wash Sale” rules will preclude the deduction.
- For assets other than marketable securities, consider structuring an installment sale, which then allows the taxpayer to report the gain in 2020 or defer the gain until 2021 or later when the sales proceeds are received. If the asset is a depreciable asset such as real estate the depreciation recapture will be reportable in the year of sale.
- Utilize the powerful and flexible Opportunity Zone Program (see attached) to defer certain 2019 and 2020 short-term or long-term gains until 2026. Since the tax election to participate in the OZ program is not made until as late as September 2021 this can provide maximum flexibility.
- Taxpayers with Schedule C activities or controlled businesses should evaluate adoption or modifying their pension or profit-sharing plans to maximize 2020 deductions, which can be finalized and funded in 2021. IRA’s, SEP’s and similar plans are not required to be funded until 2021 so give taxpayers the flexibility to fund or not depending on the Senate outcome.
- Evaluate the Cares Act provisions which allow hardship IRA/ Qualified Plan distributions up to $100,000 which can then be reported as taxable income in 2020 or over a three-year period.
- For taxpayers with depreciable real estate in excess of $500,000, secure a Cost Segregation Study (even after year-end) which can dramatically accelerate depreciation deductions and taxpayers can elect to move those deductions into 2020 for immediate benefit, or defer until 2021 if tax rates increase.
- Taxpayers can acquire business assets such as computers, vehicles, furniture or equipment and then when filing their returns elect to expense those assets in 2020 under the IRC Section 179 or Bonus Depreciation rules or forego these provisions and push more of the deductions into 2021 and later years.
- Year-end invoicing can determine when cash is actually collected and is reportable for tax purposes.
- A careful review of business receivables as well as business and personal loans for potential write-off for the 2020 year can accelerate the tax deduction. Actual write-off as part of the year-end closing process vs. simply reserving the loss will generally control the year of deductibility.
This is a partial list of the many ways taxpayers can best position themselves to navigate the unique political position we find ourselves in.
More complex strategies can be explored based on your specific facts.
Sincerely and Happy Thanksgiving,
Have a question? Contact Blake Christian.
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