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Year-End Tax Planning
FOLLOWING A TUMULTUOUS START to the year, there are
several factors that may influence key year-end tax and chari-
table planning decisions. The pandemic continues to impact the
economy, and the upcoming election may result in significant
changes to the income tax and the estate and gift tax regimes.

State and local governments are facing unprecedented budget
crises that could lead to new or larger tax burdens.

“The importance of 2020 and 2021 tax and charitable planning
discussions with all of our business and individual clients,
commencing after the election outcome is known, will be more
important than ever,” said David Gold, Treasurer of the Board of
Directors of the Jewish Federation of Greater Philadelphia.

While the election results will greatly impact future tax policy,
regardless of the outcome, the economy will likely still be in a
recession. It will be even more difficult to raise sufficient revenue
to support government spending including key social safety net
programs such as Social Security, Medicare and Medicaid.

Differing tax agendas could bring significant changes: The
Trump tax plan for the second term revolves around making
permanent several key provisions of the Tax Cuts and Jobs Act
(TCJA) of 2017 as well as a potential cut in the tax rate on capital
gains and dividends. The Biden tax agenda may reimpose a top
income tax rate of 39.6% above $400,000 and taxing capital gains
and dividends at ordinary income tax rates for those taxpayers with incomes
over $1 million.

Stradtatte, Getty Images
Key considerations for year-end decisions:
Tax rates: The prospect of increased tax rates in 2021 could lead some to
second-guess the typical planning mantra of “deferring income and accelerating
deductions” to reduce the current year’s tax bill. Effective tax rates and the value
of deductions may be worth more in 2021 if Congress does impose a tax increase
next year. However, recently enacted tax legislation, as well as some other
long-standing planning techniques, could be beneficial in 2020.

Planning idea: The CARES Act, enacted to provide COVID-19 relief, enables
the current deduction of up to 100% of adjusted gross income for cash gifts to
charity (other than donor-advised funds, supporting organizations, and private
foundations). Individuals considering large cash donations may find this benefi-
cial. The IRA charitable rollover remains an attractive alternative to those over
age 70½ who may not otherwise be able to itemize their deductions and claim a
tax benefit from a charitable contribution. Congress has suspended the pension
rules imposing “required minimum distributions,” but rollover contributions to
qualified charities could still make sense for some.

Taxes on capital gains could rise dramatically: Under Biden’s plan, taxes on
capital gains could almost double to 39.6% for taxpayers earning more than $1
million. Planning idea: Clients with appreciated assets may want to consider selling
before year’s end to lock in more favorable tax rates or consider donating those
appreciated assets to charity to take advantage of the larger deduction based on the
fair market value of the asset at the contribution date rather than selling the asset,
paying capital gains taxes that might be due and then contributing the proceeds.

Estate taxes are likely to increase: Under the TCJA, Trump increased the gift
and estate tax exemption from $5 million to $10 million with inflation adjust-
ments, bringing that amount to $11.58 million for this year. Individuals can gift
JEWISHEXPONENT.COM up to this amount without paying tax during their lifetime. Anything remaining
can be used to offset estate taxes at death. Biden has mentioned plans to reduce
the gift and estate exemption to a level closer to pre-TCJA amounts of $5 million.

Planning idea: Consider gift transactions before year-end in order to take
advantage of the higher exemption amount and remove future appreciation from
the estate. A number of estate planning techniques can be utilized, including trans-
ferring assets to charities now through charitable lead annuity trusts.

Cost basis step-up of bequeathed assets may be eliminated: Under current
law, heirs receive appreciated assets with a step-up in basis to fair market value
at the time of death. The Biden plan proposes to eliminate this rule, making
transfers at death taxable. This “taxable recognition event” would occur even if
the beneficiaries do not sell the asset.

Planning ideas: Gifts at death to charity would be exempt from the Biden plan
tax changes. However, donors who are considering making such gifts may wish
to accelerate these transfers in order to provide significant support to charities
now, as many charities face increased costs and potential decreases in fundraising
during the pandemic.

In the event that Biden wins the election, it may make sense to consider shifting
certain assets, especially those likely to continue to appreciate in value to others in
lower tax brackets such as younger generations and potentially defer capital gains
taxes that might otherwise need to be triggered.

Endowment professionals at the Jewish Federation of Greater Philadelphia
remain available to work with you and your other professional advisors to
maximize the benefits of these and other tax planning strategies for you
and the Jewish community. For more information, contact Jennifer Brier,
Interim Director, Planned Giving and Endowments, jbrier@jewishphilly.org or
215-832-0528. Content is for informational purposes only and should not be construed as
legal, tax or financial advice. When considering gift planning strategies, always
consult with your own legal and tax advisers.

JEWISH EXPONENT
OCTOBER 8, 2020
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