It sounds simple, but it bears repeating: You need to plan to have a plan.

I’m not sure who said it, or I would give them the credit for it, but the statement “You need to plan to have a plan” hit home with me.

Business owners and families need to prepare themselves to respond for possible changes in tax law as a result of the 2020 election. Those changes, which may be brought about as the result of the rapidly approaching election, may be effective as soon as January 1, 2021.

Estate planning changes

One area to focus on immediately is your estate planning. The Federal estate tax exemption may be lowered to $3.5 million, down from the current $ 11.58 million. Another possible change is the elimination of the step up in basis for inherited assets. Initial estate plans and changes to existing plans take time to think about and to draft in legal documents. If you have procrastinated on starting or reviewing your estate planning you now have a great reason to get that done.

Changes to income tax

Tax rates on ordinary income and capital gains may increase for those with higher incomes, and the ability to use itemized deductions may be limited. If you are considering a Roth conversion 2020 may be the best time. If you have a choice as to when to recognize income for tax purposes, you’ll want to consider whether 2020 may be the best time to do that.

Changes for companies

Own a “C” corporation? Rates may move up to 28% from 21%. Own an “S” corporation or an LLC? The Qualified Business Income Deduction may be phased out for those whose income is greater than $400,000.

Some of the proposed changes in Joe Biden’s Tax Plan

Following is a recap of some of the proposed changes, which include individual and payroll tax changes:

  • Adding a 12.4% Old-Age, Survivors, and Disability Insurance payroll tax on income earned above $400,000, split between employers and employees evenly.
  • Individual income tax rate for a taxable income above $400,000 would change from 37% to 39.6%, the level it was at before the Tax Cuts and Jobs Act.
  • Long-term capital gains and qualified dividends would be taxed at the ordinary income tax rate of 39.6% on income above $1 million.
  • Qualified business income deductions would also be phased out for filers who have a taxable income above $400,000

Planning to make the best of the situation, whatever it is, is our goal at Chortek whenever we work with our clients. Please get in touch if you want to talk about planning.