As the end of 2019 approaches and the holiday season commences, tax planning doesn't tend to be at the top of everyone’s to-do list. But, with U.S. presidential elections and changing tax environments on the horizon, you might want to spend some time getting your tax planning in order before 2020 officially hits. Financial Sense Wealth Management talked to tax expert Chris Hennessey on a recent edition of Lifetime Planning and Hennessey outlined what you can do now to get prepared for a changing tax environment.
See End of Year Tax Tips for audio.
How to Prepare
Hennessey advised taking time at the end of the year to review beneficiaries of investments and accounts. He’s worked with clients who have neglected this important detail and it caused problems later on. For example, someone who was recently divorced still had their ex-spouse listed on one of their accounts as a beneficiary.
For many, end of year tax planning also means donating to charities and nonprofit organizations. This also requires planning in dividing up assets to direct toward groups of your choice. If you are 70-and-a-half or older, there is a qualified charity provision for most retirement accounts allowing you to direct up to $100,000 to the charity or charities of your choice.
Anyone who is 70-and-a-half or older needs to be sure to take their required distribution from retirement accounts, Hennessey said. If you haven’t yet reached the age of 70-and-a-half, there's something else to consider as well.
If you are 65 years old or older and married, the standard deduction is $27,000. So, if you give $10,000 to charity, and you take your full $10,000 exemption under the new federal SALT (state and local tax) limitations, you have to consider how you’ll reach the $27,000 limit of the standard deduction. One way to achieve this is by bunching, Hennessey explained, where you double up on charitable donations this year.
“There is a little trick I like, which is gifting,” Hennessey said. “I’m thinking about 529 plans because under the tax laws I can take my $15,000 annual gift amount, and I can front-end it for the next five years. But if I haven't done that yet, why not do a $15,000 gift right now into a 529 plan, and then on Jan. 2 put another $75,000 into it? That way, $90,000 goes into the 529 over the next couple months.”
Tax Flight Continues
With new SALT limitations, many high-net-worth individuals are fleeing high-tax states. In places like New York, California and New Jersey that have high state income tax rates, the new $10,000 SALT limit for the deductibility of state and local taxes created a double whammy that is hitting retirees and wealthy individuals particularly hard.
Many are choosing to relocate to states with lower or no state income taxes, such as Texas, Arizona and Florida. Those who own businesses are also relocating to avoid excessive tax burdens. If some of these states aren’t careful, Hennessey said, there’s a chance they may have to deal with a permanently lower tax base in the future.
2020 Election May Radically Alter Tax Law
No one knows how the 2020 U.S. presidential elections will unfold, Hennessey said, and with the possibility that a Democratic candidate who prefers taxes ending up in the White House, investors need to be careful about tax planning over the next few years.
So far, markets do not appear to be paying attention to this possibility, Hennessey explained. That could change, as the Democratic primaries are fast approaching. Consider Elizabeth Warren’s plan for a surcharge on wealth, he said. She's proposing a two percent surtax on anyone's net worth over $50 million and six percent if you're over a billion dollars in net worth. Other tax plans candidates have floated include taxing unrealized capital gains as normal income each year.
While many people may think these plans won’t impact them, such plans tend to creep down into lower tax brackets over time, Hennessey said. The federal income tax worked this way, only impacting two percent of households when it was first introduced. Five years later, it impacted 20 percent of households. After 10 years, it impacted 40 percent of households.
“At some point, the markets will get nervous,” Hennessey said. “I think you've got to be careful. I'm not saying you should get out of the market right now, but I think you've got to be really careful about the political scene and how this all plays out.”