1. Take advantage of lower tax bills to boost savings. If Trump cuts payroll or income taxes on middle-income workers, many investors may wind up with bigger paychecks, says Ben Rizzuto of Janus Henderson Investors. It would make sense to use the surplus for savings, investments and longer-term financial goals. At the very least, setting aside these additional funds may help offset future tax increases.
2. Maximize college savings. Advisors should make sure clients’ 529 plans are opened and funded, Rizzuto says. Roth IRA assets held by parents or grandparents could also be used to pay for qualified education expenses, and if account owners are over 59½, no income taxes would apply. Students and their parents should also consider increasing their research of grants and scholarships to help lower education costs.
3. Use the lifetime gift tax exemption while you can. The $11.58 million exclusion will be around for the next few years, offering high-net-worth clients the ability to place larger amounts of money into trusts or make large charitable contributions to help ensure financial legacies are preserved and tax liabilities are limited, Rizzuto says. Charitable Remainder Trusts can help families, especially with the demise of the stretch IRA via the 2019 Secure Act. And Spousal Lifetime Access Trusts can give access to income and/or principal for the needs of a surviving spouse and are funded in the form of a tax-free gift while the donor is still alive.
Diversify, diversify, diversify. The proposals presented by the Trump administration and rival Joe Biden show how important tax diversification and flexibility will be in the future – “regardless of the election outcome,” Rizzuto says. Clients need to continue to build assets that enjoy different tax treatments. Traditional, Roth and nonqualified accounts can all provide valuable optionality. Asset location is another important consideration, so making certain that investments are held in the correct types of accounts can help provide more tax-efficient after-tax returns.
Although President Donald Trump had not yet released a formal tax proposal for his second term as of Friday, advisors should focus on three of the proposals he’s discussed if he is reelected and Republicans are able to buck polling and keep control of the Senate and win back the House.
Trump has often indicated he wants to increase take-home pay. “Most recently, this took the form of an executive order that postponed payroll taxes for employees from September 1, 2020, through the end of the year,” notes Ben Rizzuto, retirement director for Janus Henderson Investors.
That deferral affects individuals with incomes under $4,000 during a biweekly pay period, calculated on a pretax basis. Although it’s just a temporary deferral, Trump has said the deferred taxes could later be forgiven, or the cut made permanent. When he signed the order, he vowed to “terminate the tax” if reelected.
But “from a retirement planning standpoint, the change would directly affect Social Security because payroll taxes are used to finance this and other social-insurance programs,” Rizzuto warned.
Trump has also proposed reducing the capital gains tax from the current 20% rate to 15%, in addition to indexing it to inflation.
Indexing capital gains for inflation would benefit the top 1% of households in the U.S. because they would nab 86% of the benefit, Rizzuto said, citing the findings of a study by the Penn Wharton Budget Model.
Trump’s full-year 2021 budget proposal also outlines several changes that could impact those who currently hold or are seeking to secure student loans to fund their education. Overall, his proposals would cut funding for student loan programs by $170 billion over 10 years and increase borrowing costs, Rizzuto said.
While the ability of a reelected Trump to enact any of these proposals hinges on how much control Republicans retain in Congress, check out the gallery above to see how advisors can best position their clients ahead of these possible changes.
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