Evaluating Your Investment Planning in the Election’s Aftermath

BY: Chris Kelly, JD
Market President, Nashville
(615) 599-9863

Just two weeks ago, as we entered Election Day, the general consensus among the pundits and the pollsters was that a “blue wave” would sweep across both houses of Congress and the White House. This scenario would create a political pathway for tax increases, specifically for capital gains and the estate tax. The possibility of this series of events fostered uneasiness for many taxpayers and created the dilemma of whether or not to take significant action in 2020 in order to mitigate the potential effects of the dire forecast before 2021 arrived.

However, as of the writing of this article, the elections have not produced the systemic sweep, but instead have given greater probability to the reality of divided government. The current results show a 50-48 divide in the Senate (GOP v. Democrats and those who caucus with the Democrats), more Republican members in the House of Representatives, and a presidential election still not fully settled until a number of legal strategies are exhausted.

The future of the Senate now lies in the results of the runoff elections in Georgia. Thus far, pundits characterize both races as too close to call. Running through the possible outcomes range from the Republicans holding a four-seat majority in the Senate to an even split between the parties that would then place the vice president casting any needed tie-breaking vote. For the House of Representatives, the Republicans may gain up to 13 seats. The additional seats still do not give the GOP enough seats to overturn the Democratic majority, but it does make it more difficult for certain legislation to easily move through the lower house. The fewer Democratic seats also may impact who is elected in leadership positions within the body. Finally, for the White House, while Vice President Joe Biden has declared victory, the president has yet to concede and is still pursuing remedies within the courts.

Even against this backdrop of uncertainty, we can review what we do know. If the White House goes to Vice President Biden, a divided Congress lessens the likelihood of widespread changes to estate and income tax laws. And even if the Senate skews Democratic with an even split of its members among the major parties and the vice president casting deciding votes, it would still be difficult for every piece of legislation to move through the Congress quickly and easily down party lines, as there are occasionally certain issues that find supporters or opponents across both sides of the aisle.

Consequently, knowing there may be a bit more friction in the political system than forecast just a couple of weeks ago, it is now possible to more comfortably visit the traditional areas of planning that are generally relevant each year: reducing income, increasing deductions and income planning for the future.

1| Reducing Taxable Income.

a| Capital Gains. Before the election, there was concern that new tax legislation would increase the capital gains rates on certain taxpayers in 2021. In response, some investors were considering selling appreciated assets in 2020 in order to pay capital gains taxes under 2020’s tax rates. A taxpayer who believes there will be no significant tax legislation passed may not be as concerned now about selling appreciated assets before December 31 in order to realize the resulting capital gains in 2020. However, it is still advisable to review your non-retirement account holdings to see if you might be able to take losses in 2020 to offset any gains that you may also have taken, thus reducing your 2020 tax obligation.

b| Deferring Current Income. If a person believes her personal income tax rates next year will be the same or similar, and she has the option of deferring income into 2021, it may be advantageous to do so if she knows she already has a significant tax obligation in 2020. Thus, it may be a worthwhile exercise now to estimate her 2020 tax obligation and decide whether it would be better to take more income in this calendar year or defer it until 2021.

2| Increasing Deductions. The 2018 tax legislation enlarged the standard deduction, meaning that a person’s itemized deductions must be greater than the standard deduction in order to give her any advantage on her taxes. To not forgo the deductibility of some expenses and gifts, a taxpayer may “bunch” multiple years of her deductions, such as charitable gifts or medical expenses, all into one year in order to reach the higher threshold for deductibility. If a person believes her tax rates will be the same for 2021, it may now be reasonable to still consider this strategy in 2020 and thus incur the deductible expenses now that might have otherwise not been taken until 2021. By compressing two years of gifts into one year, a taxpayer is getting the maximum benefit of the deductible expenses or gifts.

3| Income Planning for the Future. While no one enjoys paying taxes, our current personal income tax rates are at relative lows compared with other times in U.S. economic history. Not only is it reasonable to believe personal income tax rates will not be raised in the foreseeable future as the U.S. economy recovers from the effects of the pandemic, but it is also reasonable to consider that income tax rates will be higher at some point in the future during our lifetimes, especially in the years we might expect to be in retirement. As a result, it may be sensible to now consider strategies for your retirement accounts that will reduce your future income tax obligations, such as a Roth conversion, explained below.

Distributions from a Roth IRA are tax-free to the recipient when they are taken. It is useful to estimate how much of a person’s anticipated retirement income will come from taxable sources (i.e. regular IRA, 401(k), etc.) versus non-taxable sources. If a significant portion of an individual’s retirement income will come from taxable sources, it may be wise to consider converting a portion of any IRAs he owns to a Roth IRA in order to ensure some retirement income will not be taxed when received years later. It is important to note that the IRS levies a tax on the taxpayer based on the value of the amount converted. However, if a person has a number of years before retirement, doing a conversion now (and paying the taxes under today’s income tax rates) could not only give potentially years of tax-free growth in the Roth, but also income tax-free distributions in retirement.

No one can perfectly predict what the next year will hold, especially when it comes to any legislation that might eventually make it into law. As with most tax-planning strategies, there are always advantages and disadvantages to particular actions, yet it is still wise to thoughtfully consider your options and take action as you deem to be in your best interest.

Of course, none of the strategies mentioned in this article are implemented in a vacuum. There are several unique facts and situations in a person’s financial life that have to be considered when evaluating whether a particular action is prudent. Your trusted advisor at Argent would be more than happy to discuss your specific situation and provide the guidance you need to make an informed decision. If you are interested in exploring your options before this year is over, please give your Argent advisor a call today.

Take the next step:

If you’d like to discuss in more detail the estate planning and trust options available to you, contact your Argent Relationship Manager, give me a call at (615) 599-9863 or call our main number at (800) 375-4646 to talk to one of our many expert trust professionals. We look forward to hearing from you.

 

Please note that the advice offered in this article is not intended to be construed as tax, legal, or accounting advice. This material has been prepared for informational purposes only and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice for the reader. You should consult your own tax, legal, and accounting advisors before engaging in any transaction.

About

Argent Financial Group

Celebrating its 30th anniversary in 2020, Argent Financial Group (Argent) is a leading, independent, fiduciary wealth management firm. Responsible for more than $30 billion in client assets, Argent provides individuals, families, businesses and institutions with a broad range of wealth management services, including trust and estate administration, investment management, ESOPs, retirement plan consulting, funeral and cemetery trusts, charitable organization administration, oil and gas (mineral) management and other unique financial services. Headquartered in Ruston, Louisiana, Argent was formed in 1990 and traces its roots back to 1930.

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