Published on 16/11/2020
The year 2020 has seen virtually everything- from our nation being in denial about the coronavirus crisis, millions of job losses, lakhs of people dying, and most recently, a Biden-Harris Government being elected.
What followed with the election drama left scores of individuals and business owners biting nails. President Donald Trump’s administration has had lenient policies that allowed saving a lot on federal taxes. One of the biggest team Biden campaigns vowed to do away with these glorious tax exemptions and make the rich pay for being rich.
While President-Elect Joe Biden has promised an economic revival amidst the COVID-19 pandemic, there might be other things he could revamp. And so, you need to mull over some important tax and investment decisions before 2021 comes to an end.
Make as much profit as you can at currently favorable tax rates.
The tax rates as of now (that is, under the Trump Administration) are PRETTY favorable. They are almost at an all-time best, a move well-appreciated by the wealthy. President-Elect Joe Biden and his V-P Kamala Harris peg themselves to be people’s leader. They want to bring people’s money back to them by taxing the rich more. Biden has proposed to increase the rates for capital gains taxes, income tax, estate and gifts tax, and even the corporate income tax.
The capital gains tax could be doubled and hiked up to 39.6% from the existing 20%. Hence, it makes all the more sense to file your taxes if you have recently come in some property, sold it for a profit, or have had any capital gains. Paying 20% taxes right now is WAY better than paying the double later on after 2020.
Similarly, the stock market sees new highs and lows every day, and currently, the market is highly expensive. For an indication, the price-to-earning ratio (P/E ratio) is at 21.54%, which is higher than an all-time average of 16.46%. All this means that you are bound to get a higher return for your stocks at the current moment than you could in the past. Come 2021, returns in stocks would not be that favorable, and you could have to settle for less.
While it doesn’t make sense liquidating all your stocks just because the market is doing well right now, you could make the most profit and pay lesser capital gains/income tax on it before Biden comes in.
Try to reduce taxable income as much as you can
Since the income tax stands to get hiked soon, you can try and avoid increasing your taxable income as much as possible. The best way to legally do it is charity. Your philanthropic endeavors have the power to make you feel better and also save a lot of money on taxes. For the year 2020, the CARES Act guarantees your exemption in your income tax for 100% of your charitable contributions.
The only given is that all these donations should be in cash and made to legitimate organizations. Contributions in no other form (stocks/property/funds) will be considered for this investment.
However, using charitable contributions to your benefit can be a tricky business. Talk to us at C19grants@mytaxfiler.com to know more about how you can do this the right way.
Mull over your IRA account
The IRA account for your retirement funds in a tax-deferred account. This means you can defer the tax payment and pay it in the future. Ideally, people wait for the taxes to be at their lowest and then pay to make the best of it.
The other thing you can do is convert your IRA account into a Roth IRA account where all the funds in that account will be tax-exempt. So, you can pay your taxes right now since the tax rates are extremely favorable and get your IRA account converted to a Roth IRA account where you’ll not have to pay taxes again.
Plan for 2021
While the Biden Administration is set to take over in 2021, the coronavirus threat is not over yet. The Federal Reserve is asking the Government for another influx of money now that the benefits under the CARES Act are about to expire. And so, the best thing you could do to safeguard your investment beginning 2021 is to diversify your investment portfolio.
Miscellaneous things to look out for
Biden’s tax plan targets the wealthy and the corporations. This would be the highest tax increase since the 1960s or the Reagan Administration. Corporations will see 7% more taxes than they do now, while people earning more than $400,000 will have to shell out 2.6% more taxes. The aim is also at taxing high-net individuals more.
And all is not lost to tax hikes. Biden also plans on extending tax cuts to people, especially for the child credit. Taxpayers will now be eligible to file for an exemption worth $3,000 instead of the current $2,000 when they do their taxes.
Nevertheless, remember that all this will only come into play when Biden’s plans are introduced in the Senate and passed if the Democrats hold the majority in the House.