Tax considerations going into year-end

With less than a month left before the year ends, investors are concerned about what they can do to create a proactive tax plan given what we know will be increased taxes in the coming few years with Biden’s tax proposal. 

Unfortunately, the Georgia runoffs on Jan. 5 have a lot to do with whether we will have a Republican Senate or not, and whether Biden can get his tax proposal passed in 2021. There's a lot of uncertainty, and accelerating the sale of stock in 2020 before the year-end may not be in investors’ best interests.

If an investor decides to sell investments this year and the tax changes aren't enacted, the investor will most likely regret their choice when their tax accountant tells them on April 15 that they'll need to pay more in taxes.

The dilemma is that Biden’s new tax proposal increases the ordinary income tax rate for those making more than $400,000 per year and makes the long-term capital gains rate equal to the ordinary income tax rate for incomes in excess of $1 million, which would mean that the current long-term capital gains rate would nearly double, from 20% to 39.6%

Should Biden’s proposal be passed, it would eliminate the step-up in basis of capital assets upon death. As an adviser, I count on the step-up in basis to pass wealth to the next generation for my clients.  Most Americans hold real estate in their portfolios and as we all know, real estate is not the most liquid of investments. Biden's proposal would also reduce the estate tax exemption of $11.58 million ($11.7 million in 2021), maybe to as low as $5 million. 

The best plan for any person holding lots of highly appreciated assets and earning a substantial amount of income (in this case $400,000 a year -- unfortunately we haven’t been told if this is for a single person or a married couple) would be to immediately:

1. Schedule a meeting with their tax preparer to run different scenarios on how the tax proposal might affect them and whether they are willing to bet on the Georgia runoff in January and decide which party ends up controlling the Senate. Should the client accelerate capital gains taxes in 2020 or take the time to create an appropriate strategy and defer them to 2021?

2. Meet with their estate planning attorney to discuss a plan to help minimize the estate tax and liquidity burden on the family’s net worth.

With everything uncertain until early next year, we know that death and taxes remain the only certain things we can count on.

[More: Biden’s economic and tax plans draw mixed reviews from advisers]

Louis Barajas is chief operating officer and partner at MGO Wealth Advisors.