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The 2020 election is shaping up to be one of the most politically polarized contests in a long, long time.
Views on taxes, entitlements, immigration, and even the nature of capitalism between the parties’ leading candidates could not be more different. Depending on who wins, America’s future may leap in widely different directions.
While it is way too early to predict who will be in power, it is not hard to tell who has the most to lose from a power shift to the left.
Regardless of readers’ political persuasions, higher taxes cost richer people wealth. Since most readers of this article may be more affluent than some, here is a punch list of wealth weak points they may want to start to form Plans B for.
Since Congress – not Presidential talking points – actually defines new tax laws, the following ideas are general danger points, and answers to any particular candidate’s proposals.
Even if the Dems win the presidency and the senate, and keep the house, too much will change between now and when they haul out the tax chopping block.
But make no mistake, that block will be intended for those with high incomes and net worths.
Remember higher taxes, if they come, will develop over the next few years, so you have some dancing room to work up a plan with your tax preparer.
Income taxes – look for rates to rise and deductions for business owners and the well-off to get squeezed. If you believe income taxes will go up, here are some strategies to consider:
Roth conversions – converting more locks in current tax rates, and converted amounts grow tax free
Accelerate recognized income – if you have flexibility on recognizing more income sooner, you will want to considerer this. Business owners and consultants may be in the best position to do this, but even employees may have some flexibility on when they get bonuses, pull the trigger on stock options and deferred comp, and so on.
Accelerate recognized capital gains – if you have appreciated stocks, real estate, or other assets like businesses you are thinking about selling, recognizing gain soon may lock in lower tax rates. And with the current chatter by some politicians about eliminating the “step up” at death, you may not be able to beat the capital gains tax at death, as you can under current law.
Accelerate Required Minimum Distributions (RMDs) – if you have pretax money in IRAs and other retirement plans, the RMD rules define how slow you can take it out, and how far down the road you can kick the tax can (defer paying taxes). There is really no limit on how fast you can take it out, and even if you are under 59 ½ there are ways to avoid the 10% tax penalty.
Take annuity distributions – “non-qualified” annuities – those not in IRAs or other tax deferred accounts – have similar tax rules to IRAs. Gains are taxable as ordinary income. You can unusually make taxable withdrawals at will.
Other potential taxes to plan for:
- Millionaire Taxes – taxing those above a certain net worth with an extra income or other tax
- Wealth Taxes – not to be confused with income tax, an annual assessment on net worth, kind of like paying an estate tax every year. The implied work burden is enough to make you die, already.
- Property Taxes – these are very tough to beat unless you move, and if they go up to finance a social agenda, property values plunge.
- Higher Payroll Taxes to “save” Social Security, look for high earners to pay lots more tax, and get lots less benefit.
- Estate Tax –wealthy folks reading this may consider hunkering down, and doing a serious estate plan and estate tax check with someone who knows how.
Of course, with the election uncertain and still far away, it will pay to methodically consider tax exposure and tactics.
Still, regardless of who rules Washington in the early 2020s, one thing is certain; deficits, Social Security, and Medicare costs will go to unsustainable levels in a few short years now, and the money will have to come from somewhere.
The best bet is higher taxes. Even if we dodge a bullet on higher income taxes in the next administration, expecting estate and other taxes to not go up in our lifetime is pretty much a pipe dream.