Wills, Trusts & Estates Prof Blog

Editor: Gerry W. Beyer
Texas Tech Univ. School of Law

Wednesday, October 21, 2020

Tax Planning by Accelerating Gain Recognition into 2020

TaxDemocratic Presidential nominee Joe Biden has recently released a tax plan which may significantly increase the capital gain tax. The plan includes a proposal, which if accepted, "would eliminate the preferred 20% rate on long-term capital gain and qualified dividends for taxpayers with more than $1 million in taxable income."

The Biden plan would subject this type of income to tax at regular tax rates, "with the highest bracket ordinary income tax rate returning to the 39.6% rate in effect prior to the Tax Cuts and Jobs Act of 2017."

"If this proposal is adopted wholesale, it would mean that capital gains subject to a 20% tax rate if recognized in 2020, could be subject to nearly double that tax rate in 2021 or 2022 (or later)."

When tax rates increases, it is possible for a taxpayer to to save income tax by accelerating income tax gain and measuring the potential opportunity cost of paying tax early. 

"By paying tax earlier, the taxpayer will not have the investment returns from funds used to pay the tax because the dollars used to pay the tax are no longer available for investment."

Below are a few ways taxpayers can cause the recognition of gain if interested in accelerating the gain and paying the income tax in 2020:

  • For those taxpayers who own highly appreciated publicly-traded stock, the taxpayer can simply sell and then repurchase the securities. The “wash sale” rule of Section 1091, which generally disallows losses when a shareholder sells securities for a loss and repurchases the same or substantially identical stock or securities, does not apply to disallow recognized gains.

  • Taxpayers who make installment sales in 2020 may elect out of installment sale treatment (causing all of the gain to be recognized in 2020 as opposed to be deferred until the future).

    Taxpayers who sold a company and reported part of the purchase price as an installment sale in prior years can generally accelerate the recognition of the capital gain on the installment sale by either pledging the note as security for a bank loan (which generally accelerates immediate recognition up to the amount of loan proceeds), or by selling, gifting, or exchanging the note. For example, taxpayers may consider gifting or selling the notes to a non-grantor trust, which would cause the gain to be recognized.
     

  • For taxpayers with closely-held business interests, with expectations of selling such business interests in 2021 or 2022, there are a number of ways to recognize the gain at today’s 20% rate, thereby generating basis that can be used to offset gain against sale proceeds in the future (which such proceeds may be taxable at the 39.6% tax rate)

See Stephanie J. Derks & Jason J. Kohout, Tax Planning by Accelerating Gain Recognition into 2020, Foley & Lardner LLP, October 14, 2020. 

Special thanks to Jim Hillhouse (Professional Legal Marketing (PLM, Inc.)) for bringing this article to my attention.

https://lawprofessors.typepad.com/trusts_estates_prof/2020/10/tax-planning-by-accelerating-gain-recognition-into-2020.html

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