THE ELECTION’S 

potential tax impacts 

 

 

Last updated November 10, 2020

In any Presidential election year, we consider ahead of time how a change in leadership may impact the financial aspects of our clients’ lives.

While this election will impact so much more than just finances, as your Family CFO, the focus of this point-of-view from our tax experts is solely on finances.

Trump’s administration brought a period of relatively low taxation and oversight, while a Biden administration will likely push for an increase in both, as outlined below. 

However, we won’t fully know the balance of power in Washington until January as some Senate races remain undetermined. Regardless of the final outcome, our internal experts project only some incremental changes at most – not a major tax overhaul.

Given this uncertainty, our general guidance is to avoid making major financial decisions based only on speculation of what will happen in the future. There is not currently any added urgency to make changes to your financial plans in light of the election results.

With all that in mind, here is a high-level outline of possible tax policy changes proposed by Joe Biden before the election.

Deduction limits Lifted

Elimination of the $10,000 limit on the deduction for state and local taxes would be especially relevant to those living in states with higher income and property tax rates. 

Higher income TAX RATES
  • For those earning more than $400,000 per year, the top marginal tax rate could be restored to 39.6%. The rate is currently 37%, a number Donald Trump wants to make permanent.
  • The value of itemized deductions could be capped at a 28% tax rate.
  • The 3% Pease limitation on itemized deductions could also be restored. It is currently set to return in 2026, but Donald Trump wants to keep the current repeal permanent.
  • The practice of swapping one business or investment property for another to defer capital gains taxes (“1031 Exchanges”) would be eliminated.
  • A 12.4% Social Security payroll tax, split evenly by the employee and employer, may be imposed on wages above $400,000 a year.
Capital gains taxed at ordinary income rates

This change could nearly double the current capital gains tax rates but only for those earning more than $1M per year. Capital gains are currently taxed at a 20% rate for taxpayers with income in excess of $441,450 for single filers ($496,600 for married filing joint), indexed for inflationthe starting point for the 20% bracket will match the starting point for the top ordinary income tax bracket in 2026, but Donald Trump wants to make the current capital gains tax brackets permanent. 

Limiting tax-free lifetime gifts

Decoupled gift and estate tax exemptions, limiting lifetime gifts to $1M per donor.

Increased taxes on gifts
A tax rate increase from 40% up to 45% on estate, gift and Generation-skipping Transfer (GST). Gifts made to younger generations could be taxed at higher rates. These changes proposed by the Biden campaign may require significant planning to grandfather the current exemptions for those with larger estates. 
Adjustments to capital gains at death
A Biden administration would be expected to adjust the treatment of capital gains at death: either completely eliminating the tax provision of basis step-up or taxing the unrealized gains at death. Heirs of investments could be taxed based on the original cost instead of the stepped-up basis. Some gifts of appreciated assets that might otherwise be deferred should be considered more immediately to take advantage of the current provision. 
Restrictions on family financial gifts

A Grantor Retained Annuity Trust (GRAT) is an estate planning tool that minimizes taxes on large financial gifts to family members. A GRAT is a type of irrevocable gifting trust and is established for a certain term or period of time. The individual establishing the trust reports a gift when the trust is established. Assets are placed under the trust and then an annuity is paid out every year. When the trust expires the beneficiary receives the assets tax-free.

If the individual who establishes the trust dies before the trust expires, the assets become part of the taxable estate of the individual, and the beneficiary receives nothing. Rolling GRATs minimize the risk of mortality during the term, which increases the success of transferring wealth. A 10-year minimum term would eliminate this option. 

Loss of Grantor Trust rules
Grantor trusts have several characteristics that allow the owners to use the trusts for their specific tax and income purposes. Loss of Grantor Trust rules would eliminate the ability to complete sales transactions with Grantor Trusts without income tax consequences. 
Cap on annual gift exclusions
An expected annual cap of $50,000 would be applied on annual exclusion gifts.

navigating the waters

Your Moneta team is preparing for the potential changes in tax policies by evaluating strategies that could mitigate their impact. Following are some of the strategies we may recommend for you:

TAKE ADVANTAGE OF LOWER 2020 TAX RATES

If you are in the position to be able to accelerate your income to land in the 2020 tax year vs. 2021, following are some strategies we could employ:

  • ROTH Conversion to take advantage of current lower income tax rates before they rise.
  • Gain harvesting to take advantage of lower capital gains rates in 2020.
  • Complete business sales transactions before year end.
  • Realize gains in irrevocable grantor trusts before year end.

GIFTING BEFORE YEAR-END

In 2020 you could execute on your $11.58m gift and estate tax exemption before year end with several options:

  • Spousal Lifetime Access Trusts (SLATs): A type of irrevocable trust created by one spouse for the benefit of another.
  • This could be coupled with an insurance policy for the beneficiary spouse that is owned in anIrrevocable Life Insurance Trust (ILIT) if only one spouse’s exemption is utilized.
  • Grantor Retained Annuity Trusts (GRATs): an estate planning tool that minimizes taxes on large financial gifts to family members.
  • Sales to Intentionally Defective Grantor Trusts (IDGTs): a common estate-planning tool used to transfer wealth to family members during the life of the grantor by freezing the value of certain assets for estate tax purposes, but not for income tax purposes.
  • Outright gifts to individuals.

REFINANCING DEBT

While Applicable Fixed Rates (AFR) are historically low, refinancing intrafamily debt could be a wise option for you.

THE HOUSE AND SENATE RACES

In general, the market doesn’t like uncertainty or sudden change. The market has historically preferred the House and the Senate have different majority parties in power. If control over the White House and Senate switches from the Republicans to the Democrats, we could see increased volatility in the financial markets as they react to the potential for significant tax policy changes. 

Because it takes both bodies of Congress to agree on changes to tax policy, here is how the math plays out for each. 

Republicans currently hold a narrow 49-48  lead in the Senate as the races for both seats in Georgia head to a run-off. Because of this, we won’t know which party wins control of the Senate until January.

The Democrats currently lead in the House, winning 216 seats compared to 204 for the Republicans. Final control of the House remains undetermined, however, as 15 races have yet to be called. 

KEEP IN MIND: Even if Democrats do eventually win control of both the Senate and House, our internal experts believe a major tax overhaul in 2021 seems unlikely given that some Democratic senators face competitive races for their seats in 2022. 

TIMING

Know that your Moneta team is prepared for the fiscal impact of the election’s results either way. Some tax payers with higher incomes may want to adjust some of their tax and estate planning strategies before year end, particularly those that are:

  • High-net-worth individuals who expect to earn more than $400,000 in 2021
  • Persons who expect to recognize large capital gains in 2021 and could take advantage of lower tax rates in 2020
  • Tax payers with estates in excess of $3.5 million to $5M, or married couples with $7M to $10M

As always, your Moneta team will stay in touch with you as things progress.

ELECTION PERSPECTIVES

© 2020 Moneta Group Investment Advisors, LLC.  Given the dynamic nature of the subject matter and the environment in which these materials were prepared, they are subject to change.  These materials were prepared for informational purposes only; nothing contained herein is intended to represent advice, nor a recommendation of any one party. Assumptions as to what may change given how the election is decided are based on materials that have been deemed reliable but which have not been independently verified. Examples contained herein are for illustrative purposes only based on generic assumptions.  This is not an offer to sell or buy securities, nor does it represent any specific recommendation.  You should consult with an appropriately credentialed professional before making any financial, investment, tax or legal decision. These materials do not take into consideration your personal circumstances, financial or otherwise.