The Impact of Proposed Tax Changes on Individuals, Businesses, Estates, and Charitable Giving

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Adams Brown Tax Team Outlines Complexities of 2020 Year-End Planning

Year-end tax planning is always important; there are certain strategies that are almost universally used to maximize tax savings and cash flow before a new year begins. 2020 has brought additional challenges for individual and business taxpayers alike. Temporary tax breaks in the CARES Act, COVID-19 tax implications, and the proposed tax plan for President-Elect Biden are all significant factors for anyone trying to minimize their tax burden and take advantage of available resources.

On November 30, 2020, Adams Brown Senior Manager Austin Coyan, CPA, CFE, Principal Jennifer Berning, CPA, and Senior Staff Accountant Cody Scheck, CPA presented a year-end tax planning webinar to help clients better prepare for what’s to come.

Biden’s Proposed Tax Plan for Individuals: Cody Scheck, CPA

With the Georgia Senate election still undeclared, it will be difficult to really pinpoint the tax changes likely to come in 2021. If Congress remains split between a Democratic House of Representatives and Republican Senate, it is less likely that all of Biden’s proposed tax changes will come to pass. That could change; the tough part right now, Cody explained, is that much is still unknown.

The tax items that are more likely to change include the top income tax rate, expanding the Social Security payroll tax, raising the long-term capital gains tax rate, and more.

Biden has previously expressed support for raising the top income tax rate to its pre-2018 level of 39.6 percent for taxpayers earning more than $400,000 annually. Recall that the Tax Cuts and Jobs Act temporarily lowered the top tax rate to 37 percent; currently, Cody said that an annual income of $400,000 is taxed in the 32 percent bracket. The Social Security payroll tax could also get imposed on income over $400,000; currently, this tax phases out at $137,700 so there is the potential for what has been referred to as a ‘tax donut hole’ whereby income between $137,700 and $400,000 does not get taxed for Social Security but income both above and below those thresholds do.

Long-term capital gains taxes could also be going up. Biden has proposed taxing long-term capital gains and dividends at 39.6 percent for taxpayers with more than $1 million. Currently, capital gains have a top rate of 23.8 percent.

Other potential tax changes include:

  • Limitations and phaseouts on itemized deductions for taxpayers earning more than $400,000 annually
  • Increasing the maximum child tax credit from $2,000 per child to $3,000 per child
  • Increasing the child and dependent care tax credit
  • Reestablish the first-time homebuyer tax credit, which could provide up to $15,000 in tax benefits toward the purchase of a first home

There are other proposed changes, but they lack detail at this point.

Biden’s Proposed Tax Plan for Businesses: Jennifer Berning, CPA

Some businesses could also be facing tax changes ahead. One of the more notable changes that Jennifer mentioned is the possibility of eliminating the qualified business income deduction. This is currently available for individuals who have self-employed income on a Schedule C or Schedule F or they have pass-through business income from an entity.

The QBIT, as it’s called, provides an estimated 20 percent reduction in the taxable net business income. Under Biden’s proposed plan, taxpayers with income above the $400,000 threshold would see this deduction removed.

Changes for C-Corporations could also be on the way. Currently, corporations are taxed at a flat rate of 21 percent; under Biden, this could increase to 28 percent. He has also called for imposing a 15 percent AMT on book income for corporations with more than $100 million. Jennifer mentioned there are fewer details on this last proposal; though she pointed out that corporations essentially have ‘two’ sets of books: book income and tax income. There are some deductions that can lower book income and create tax advantages. Speaking to Biden’s proposal to create a 15 percent AMT on book income, the impact of some of these deductions could be limited.

As with individual tax changes, it’s unclear at this point what we can expect, or the extent to which some or all of these changes will come to pass. It is unlikely that major tax changes will happen overnight, but it is important to plan for different likely scenarios based on what we know today.

Biden’s Proposed Tax Plan for Estate Planning: Austin Coyan, CPA, CFE

Austin CoyanOne of the first things that Biden talked about regarding estates is the step up in basis when a taxpayer passes away, Austin explained. Currently, when a taxpayer passes away, any assets they own are revalued, which determines the new basis for the party inheriting the assets. What that does is reduce capital gains if that asset would be sold or disposed of. Biden is proposing to eliminate that step up, which basically means that when a taxpayer passes away, the asset’s original basis would be maintained. What would happen next is if the heir sells or disposes of that asset, they would owe the additional tax for the revalued asset.  

Another potential estate planning change is rolling back the lifetime exemption to about $3 million per person, compared to $11.52 million now. At the end of 2025, the $11.52 million exemption is set to sunset anyway to about $5.2 million. Under Biden’s proposed plan, anything in a decedent’s estate value above the $3 million-or-so ceiling would be subject to estate tax. The combination of the reduced lifetime exemption and higher capital gains tax would mean a potentially big impact on high-value trusts and estates.

Year-End Tax Planning for Charitable Contributions: Austin Coyan, CPA, CFE

After the Tax Cuts and Jobs Act, far fewer taxpayers itemized their annual returns because the standard deduction basically doubled. The charitable contribution deduction thus became far less valuable. One strategy to offset this change is to bundle charitable contributions.

Instead of giving one organization $1,000 per year, maybe one year the taxpayer gives that same organization $2,000 instead, and the next year, nothing. The year after that, give them $2,000 again. This strategy allows taxpayers to build up their contributions and stand a greater chance of itemizing them on their annual return.

Temporarily, the CARES Act raised the AGI limit for charitable contributions from 60 percent to 200 percent, making 2020 the year to potentially give more money to charity for a better tax benefit. Getting down to a zero percent tax rate may not be the best strategy, though – this is where a tax advisor comes in because we can look ahead.

Charitable giving also ties heavily into estate planning, Austin explained, because if a taxpayer thinks he or she will have a taxable estate, they can gift appreciated stock or assets. This means that those gifted assets have a fair market value worth more today than what was initially paid. This is one way to get higher value assets out of an estate.

Bear in mind that whether dealing with an estate or not, donated goods worth more than $250 require a receipt from the nonprofit. Assets valued at more than $5,000 require a certified appraisal. Finally, for charitable events or auctions, remember to deduct the fair market value of what you receive to find the deductible amount; for example, the value of the dinner.

Finally, Austin touched on charitable contributions out of IRAs. Taxpayers who are required to take a required minimum distribution but don’t need it can instead use that money toward a charitable deduction. When that money is given straight to a charity, the tax bypasses the taxpayer. He or she also doesn’t have to worry about itemizing their return.

Next Steps

Given the many complexities of year-end tax planning in 2020, it is important for taxpayers to meet with their advisor as soon as possible. The closer to year-end, the harder it is to gain a true tax advantage. Remember that every situation is unique and may require a different solution than mentioned here. Austin, Jennifer, Cody, and the entire Adams Brown tax team are ready to answer your questions. Reach out to us today.