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Jeffrey Levine: 5 Tax Tips for Wealthy Clients to Consider Before It's Too Late

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President-elect Joe Biden has proposed substantial changes to the tax code, mainly focused on individual income and investment taxes, and at least some of them stand to have a significant impact on high-net-worth investors.

The proposed changes create challenges, but also planning opportunities, for advisors and their HNW clients, Jeffrey Levine, Buckingham Wealth Partners director of advanced planning and lead financial planning nerd, said during a recent Kitces webinar.

Here are his top suggestions for advisors and their HNW clients:

1. Consider “accelerating” some 2021 income before year-end.

Because President-elect Joe Biden has proposed raising taxes on those making more than $400,000, it may make sense for advisors to tell their highest-earning clients they can try to “accelerate” at least some income from 2021 to before the end of 2020 if possible, Levine said.

But we won’t know until after the Georgia Senate runoff elections next month if Biden even has a chance of achieving that proposal because, right now, Republicans control the Senate, he noted.

The “most obvious candidates for accelerating income” to this month are those already in the highest tax bracket and expect to stay there in 2021, he explained.

The worst-case scenario if they accelerate income into 2020 is that they end up paying the same rate on that income. However, “if rates go up, you’re almost certainly going to be ensnared by those higher rates” to at least some degree, he noted.

Four ways to accelerate income are Roth conversions, asking employers for an advance on a bonus or, if you own a business, accelerating billing or delaying expenses until January.

2. HNW clients may want to accelerate a deduction into 2020.

Some high-net-worth clients may benefit from at least one potential Democratic tax move.

Levine stressed that a repeal of the state and local tax (SALT) deduction cap of $10,000 that was included in the Republicans’ Tax Cuts and Jobs Act of 2017 was not included in Biden’s announced tax plans. However, a repeal of that cap will likely be included in any Democratic-backed piece of tax legislation, Levine predicted. That stands to save a significant amount of money in taxes for HNW clients who live in New York and other states with high property taxes.

Anybody with a marginal tax rate higher than 28% may want to make certain itemized deductions now instead of 2021, Levine suggested.

3. HNW clients may want to speed up the sale of certain assets.

Advisors may want to quickly point out to clients who normally make more than $1 million a year (or could make more than $1 million next year) that they may want to speed up the sale of certain assets before 2020 ends, if possible, according to Levine.

Such a move would “ensure that gain is not going to be taxed at a higher rate” if Biden is able to successfully tax capital gains at 40% for those making over $1 million a year, Levine said. However, Biden’s ability to get such a plan passed by the Senate is yet another thing that depends on the outcome of next month’s Georgia runoffs.

4. There are some options to consider if capital gains taxes soar next year.

If Biden successfully pushes his capital gains changes through next year, advisors can tell their clients who expect to make more than $1 million in 2021 that they have a few options to try and lower their incomes under $1 million next year. Examples include increased use of installment sales of assets including businesses, non-dividend producing stocks, municipal bonds or investment-only variable annuities, he noted.

5. HNW clients may want to transfer property to loved ones sooner rather than later.

The base estate and gift tax exemption was doubled from $5 million to $10 million under the TCJA and is $11.58 million per person this year. However, it’s already scheduled to sunset at the end of 2025, Levine noted, adding Biden has called for an immediate decrease to $5.85 million in 2021.

Therefore, Levine suggested  advisors divide their clients into three groups: “Smallers” (those whose net worth is small enough they don’t have to worry about the estate and gift exemption change); “Ballers” (clients with high enough net worth that they can afford to give away their exemption amount now and “not really feel it at all”); and “Allers” (those with the most net worth who should really give all or “substantially all” of their assets away to avoid leaving their loved ones with a huge tax bill if they die).

Another suggestion: If married couples are thinking of gifting assets before the end of this year, they should use all of one spouse’s exemption amount this year before using any of the other spouse’s exemption because the IRS has said it won’t seek a “clawback” for gifts made under TCJA.

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