By: Matthew Henry, CPA
Brown, Chism & Thompson, PLLC
With the presidential election fast approaching, one of the biggest topics being mentioned by both candidates are taxes. The idea of taxes is not new. The Revolutionary War, in part, was started because Britain was taxing the colonies without giving them representation in the government. The role and complexity of taxes have since evolved, but the inevitability of taxes has remained. Part of the reason taxes exist are to generate income for the government, to fund services which the government provides to its people. Some prior presidents have had this to say about taxes.
“Taxes, after all, are dues that we pay for the privileges of membership in an organized society”
Franklin D. Roosevelt
“Excessive taxation… will carry reason and reflection to every man’s door, and particularly in the hour of election”
“The power of taxing people and their property is essential to the very existence of government”
“The government’s view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it.”
These quotes summarize some of the historical view on taxes, by some of the most well-known presidents of this country’s history. All and all, taxes are going to stick around.
In 2020, the two presidential candidates have very different takes on taxes. President Trump wishes to continue to lower taxes, while former Vice President Biden, wishes to roll-back Trump’s previously enacted tax law (The Tax Cuts and Jobs Act). The current proposal from Biden to roll-back the TCJA would likely be an increase in taxes for more than just those people making $400,000 or more; while Biden claims those who make over $400,000 will be the only taxpayers affected. Taxes are not solely up to the current president; the legislative branches play a role in getting the details of tax proposals hashed out. If the House of Representatives or the Senate are of the party of the president, they will have a lot easier time getting their tax proposals passed and enacted into law. Whether President Trump is re-elected or if Biden is elected, taxes will still be inevitable. Below are some tax planning considerations to make no matter who is elected president on November 3rd.
If you believe that the tax rates will go up, the following tip may help plan for your 2020 taxes.
Accelerate income and defer deductions: The premise of this strategy is to push your income to the years in which the tax rate will be lower, while deferring your deductions to years in which the tax rates will be higher. This makes your deductions a bit more valuable in helping to lower your tax burden in years of higher rates. One way to accelerate income is to convert an IRA to a Roth IRA. For example, if you convert $100,000 from an IRA to a Roth IRA, you will pay tax on the conversion of $100,000 now while the rate is lower; rather than paying tax on your Required Minimum Distributions (RMD’s) in the future when the rate may be higher. Regarding the conversion subject to tax mentioned above, the $100,000 would be taxed at your highest marginal rate. Roth conversions may also help reduce the amount of Social Security income that is subject to tax.
If you believe the tax rates will continue to go down, the below strategy could potentially work for you.
If the rates continue to stay the same or go down, eliminating or deferring tax on ordinary income usually makes the most sense. Deferring income through retirement contributions and planning, as well as making use of bonus or accelerated depreciation, will help eliminate or help lower ordinary income levels.
The complex realm of taxes is not going to change or get simpler any time soon. If you need help planning for the upcoming year, or just want some help planning for the future, whether that be for personal or business taxes, we are happy to help.
Matt Henry, CPA
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