By Nik Aamlid, Wealth Advisor, Pinnacle Wealth
Questions surrounding the election and turbulent stock market seem to be top-of-mind for a lot of our relationships as of late. Many are asking how a change in presidential administration could potentially affect their tax and financial plans. Based on some proposals that have been put out by the Biden team, here is a list of possible changes if he were to take office and some strategies to consider. These are all obviously subject to change, but things change fast in an election year, so it gives us some thoughts to consider and a chance to start putting some “What if” plans in place.
What’s Being Discussed:
- Expanding the Social Security tax to include income above the current wage-based limits
- Increase on capital gains tax
- Proposing to eliminate step up in cost basis for appreciated assets
What to Consider for 2020:
If Biden would win and it would seem as though your tax bracket is on the rise, one of the things to consider for 2020 is to front-load your income. This allows you to pay the lower tax before it gets increased. Here are a few items to consider:
- Roth conversions – If your tax bracket is proposed to increase in 2021 and subsequent years, 2020 may be a good year to consider Roth Conversions from your traditional IRA’s as you are paying the tax on the converted amount and a lower rate.
- Backdoor Roth IRA contributions – This has become a strategy for people that are beyond the income limit for Roth IRA contributions.
- Build dollars that can be accessed tax free down the line.
- Harvesting gains inside taxable accounts – with a potential increase in capital gains coming, you may want to consider paying some of those gains in 2020 rather than waiting.
What to Consider for 2021:
- Defer business expenses – If you have larger business expenses coming, perhaps, you hold off until January 1st or later to be used as 2021 write-offs.
- Gift clumping – right now the standard deduction is fairly high, but with potentially higher taxes in 2021 a strategy may be to “clump” your giving in 2021 to help surpass the standard deduction and make itemizing your taxes an option.
- Harvesting your losses – this might be the time to pass on some of your losses from 2020 and use them in 2021 to offset income.
These should be conversations you are having with your advisor and your tax professional. Many of these strategies take time, so don’t wait until the end of 2020 to begin planning for these scenarios.
If you need help, please, give us a call at (605) 271-6023 or visit www.pinnaclewealth.com to setup a complimentary, no obligation meeting.
Converting from a traditional IRA to a Roth IRA is a taxable event. This piece is not intended to provide specific legal, tax, or other professional advice. For a comprehensive review of your personal situation, always consult with a tax or legal advisor.
A Roth IRA offers tax free withdrawals on taxable contributions. To qualify for the tax-free and penalty-free withdrawal of earnings, a Roth IRA must be in place for at least five tax years, and the distribution must take place after age 59½ or due to death, disability, or a first time home purchase (up to a $10,000 lifetime maximum). Depending on state law, Roth IRA distributions may be subject to state taxes.