WHAT TO DO
The main criterion for committing to a new plan now is that it is something you would have done eventually. Adjustments should not be something that springs to mind out of fear of the November election.
One easy change is converting an individual retirement account to a Roth retirement account. The money in a traditional I.R.A. is taxed when it is taken out. With a Roth I.R.A., you pay the tax on the deposits, and the money grows tax free. But a conversion requires the tax to be paid now, which can be a hard check to write, even if the long-term gain is better.
There are ways to offset the tax owed by claiming a loss this year. People who own rental properties that have generated passive income, or revenue that requires little to no effort to earn, can depreciate the value of the property and use that to offset the tax owed on a Roth conversion.
Another simple change involves charitable giving. A provision in the CARES Act allows for 100 percent of charitable donations made in cash to be counted against your income this year. Normally, the deduction is capped at 50 percent of your income, with any amount more than that carried forward to subsequent years.
Giving to heirs before the end of the year also makes sense as a tax strategy. And as the exemption level goes up each year, you can consider topping the gift off annually.
In a tax overhaul passed by Republican lawmakers in 2017, the exemption on the estate tax was doubled to more than $23 million for a couple (with a 40 percent tax rate on any amount over that). But that benefit expires in 2025. One concern among wealthy taxpayers is that a Democratic sweep on Election Day could bring that date forward, lowering the exemption amount back to what it was in the Obama era and increasing tax rates to pay for the ballooning federal deficit.
Whether that will happen is hard to predict, so advisers are counseling clients to make big tax-free gifts now only if they were planning to do so anyway.
In next blogpost, we will discuss what not to do.