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Is It Time to Plan Now for Tax Changes After the Election?

Both presidential candidates have distinct views on taxes. And at the risk of oversimplifying things, a re-election of Donald Trump is not likely to lead to a meaningful alteration of our current tax code. If Joe Biden wins the election this coming autumn, however, then the tax code is more likely to be changed. That’s especially the case if Democrats also re-take the Senate.

With Biden currently leading the polls, tax changes may be coming in early 2021. And they would likely be retroactive to January 1, 2021. That’s why many are thinking of making moves now to stave off the impact of tax code changes to come.

Many of Joe Biden’s suggested tax code changes would be aimed at the wealthiest Americans (“the top 1%”) and corporations. For example, high-income earners may see their capital gains and dividends taxed at higher rates than they are now. And corporations, which benefited from a move a few years ago from the reduction of corporate tax rates from 28% to 21%, may see a shift back to that higher rate. For most people, tax code changes may be more modest. 

To be clear, it’s often unwise to make any moves based on future scenarios. You should only do so if you are fairly confident of a Biden win. Or you can wait to make such moves until after the election results are in. 

One of the greatest impacts of changing tax laws may relate to the inheritance of investments, real estate and current assets. Currently, heirs receive a “stepped-up basis,” which means the assets are valued at their worth at the time of death. If a parent bought a house for $300,000 and it’s now worth $600,000, the beneficiary of the inheritance has a stated ownership value of $600,000, not the original price paid. That house could be sold the very next day without any meaningful tax consequences. Under Joe Biden’s plan, that step-up in basis would be eliminated, so heirs would more likely owe taxes on inherited assets when they are sold. 

Other possible tax code changes ahead include the return of uncapped state and local tax deductions, a key provision of the 2017 tax code changes that seemed intent on penalizing Blue State voters.

While Joe Biden has not formally discussed it in his campaign, Democrats generally favor lower estate tax thresholds. Currently, a married couple can shield up to $23 million of their estate from estate taxes when they pass away. That threshold may be cut in half in the next few years. The $23 million threshold expires in 2025, in any event. 

It’s pretty clear that taxes are not going down any time soon. The massive budget deficit in place ensures that. However, there is always a chance that middle-class tax rates inch up somewhat. That’s why some investors are now moving to migrate more of their funds from an IRA into a Roth IRA in 2020, which is known as a “Roth IRA conversion.” Such migrations would cost more in the future if taxes rise. Although such conversions are taxed at ordinary income rates now, the ability of Roth IRA balances to grow without future taxation is an especially appealing feature for the years ahead. 

Also note that if the stock market slumps, that’s a grate time to do a Roth IRA conversion. Transferring investments into the Roth while prices are depressed sets the stage for higher longer-term returns that will be untaxed when harvested or bequeathed. 

Before making any major moves now in anticipation of changes in the tax code, you should first set up a time to talk to your accountant or fee-only financial advisor.