Good Bye 2020, Hello Taxes

November 10, 2020

Good news: The Year 2020 is coming to an end. Historians will look back at 2020 as an epic year for chaos in the United States. We will not miss the Covid-19 Pandemic, the social unrest across the country, or the contentious presidential election.  Bad News: now that the election is over, and we have a new administration in the White House, we can expect taxes to increase in the near future. President-Elect Joe Biden made it very clear during his campaign that tax rates will be increasing for the wealthy.

PolicyBiden Proposal
Individual Tax Rate39.6% for income of $400,000.
Capital GainsTax capital gains and qualified dividends for income over $1 million at ordinary rates.
DeductionsLimit itemized deductions for taxpayers in tax brackets higher than 28%.
Estate & Gift TaxEliminate stepped-up basis on transfers of appreciated property at death.

Although we are not certain as to the timing of the proposed changes, we do know the changes will not take place until 2021 at the earliest. In the remaining weeks of 2020, you should consider the following ideas to take advantage of current law:

Accelerate Income and Deductions

If you make over $400,000 a year you should consider accelerating some 2021 income into 2020. As an agency owner monitor your income and expenses closely over the remaining weeks of 2020 because your expenses will be more valuable in 2021 than in 2020. Defer expenses where possible. With the highest tax rate going up from 37% to 39.6% it could be beneficial to pay taxes now rather than next year.

Be Generous

Under current law, itemized deductions offset the highest-rate income first. So, if a taxpayer is in the 37% ordinary income tax bracket and has $100,000 of itemized deductions, those deductions would reduce income in that top bracket and save the taxpayer $37,000 of taxes ($100,000 x 37% = $37,000 taxes saved). Joe Biden’s proposal would cap the benefit of itemized deductions at 28%. So that same taxpayer, still in the top bracket of 37%, would only save $28,000 for that $100,000 of itemized deductions ($100,000 x 28% max benefit = $28,000 taxes saved).

Therefore, if you are charitably inclined and have a high income, 2020 is a great year to open a Donor Advise Fund (DAF). With a DAF you can contribute a large amount of income today, get the itemized tax deduction, and invest the funds for future gifting.

Sell Now

If you are considering selling or close to selling your agency, try to complete the deal before year-end or at least structure the deal to spread out capital gains to keep your income under $1M. With Joe Biden’s proposed plan, long-term capital gains and qualified dividends will be taxed at 39.6% for households earning $1M or more. If selling your agency in 2020, the capital gain income would be taxed at a Federal rate of 20% (plus any state taxes). However, if selling in 2021 or later, the Federal capital gains rate on that income could jump up to 39.6%.

It is important to realize that the Biden Plan that takes effect could significantly change from the initial campaign proposal (remember George Bush’s campaign promise “Read my lips”). However, now is a great time to understand and plan for potential changes before the tax rates increase. If you would like to discuss any tax planning strategies, please don’t hesitate to reach out to BDF.

BDF’s Commercial Insurance Practice Group understands equity compensation and the valuation of a business and uses this knowledge to help insurance professionals develop financial plans while minimizing tax bills. Whether working with a producer or business owner, we focus on one’s individual goals, family involvement and living a full life.

Jim King, CPA, CFP® is an owner and wealth manager at BDF where he leads the Commercial Insurance Professionals Practice Group. He uses his understanding of the insurance industry to help insurance professionals maximize their prime earning years, develop a discipline around saving those earnings and put a plan in place to best utilize assets. His focus on creating financial blueprints for his clients has earned him recognition as a “Five Star Wealth Manager” by Chicago Magazine.