CARES, Capital Gains and Proposition 19: Your 2021 Financial Planning Guide

Advanced Planning Team, First Republic Investment Management
February 1, 2021

It’s 2021 and we’re all navigating an unprecedented degree of change. With tax season already on the horizon, we recommend you learn more about how California’s Proposition 19, updates to the CARES Act and other big changes may affect your financial profile this year.

Biden’s new tax plan

During the 2020 presidential race, President-elect Joe Biden released a proposed tax plan that included a number of policies that would repeal major tax reductions for corporations and high-income individuals. Below are some key elements in Biden’s proposed tax plan:

Ordinary income tax rates: Under Biden’s tax plan, the highest marginal income tax rate would increase from 37% to 39.6%. Additionally, the tax brackets would change so that the highest marginal rate would apply at a lower income level, affecting taxpayers with incomes in excess of $400,000.

Long-term capital gains / qualified dividends: Under Biden’s tax plan, taxpayers with annual income in excess of $1 million would be taxed at the highest ordinary income tax rate of 39.6% on capital gains and qualified dividends. Under current law, long-term capital gains and qualified dividends receive favorable tax treatment at a maximum federal rate of 20% (plus a 3.8% net investment income tax on certain investment income).

Income tax deductions: Biden’s tax plan proposes capping the tax benefits of itemized deductions at a 28% rate for individual taxpayers with annual incomes of $400,000 or more. The cap would mean that $100,000 of itemized deductions would be worth a maximum of $28,000 in federal income tax savings instead of the higher value of the individual’s applicable tax bracket. Under current law, there’s no overall cap on itemized deductions (although there are limits on specific itemized deductions, such as deductions for mortgage interest and for state and local taxes).

Corporate taxes: Biden’s tax plan proposes increasing the tax rate on corporate earnings to 28% and applying a 15% minimum tax on “book” profits for corporations with at least $100 million of annual income. The current federal corporate tax rate is 21%.

Estate, gift and generation-skipping transfer (GST) taxes: Biden’s tax plan proposes to reduce the estate, gift and GST tax exemption amounts to the 2009 levels of $3.5 million per person and to increase the top estate tax rate to 45%. Under the current estate and gift tax laws (which are scheduled to sunset at the end of 2025), the estate and gift tax exemptions for 2021 are $11.70 million per person while the top estate tax rate is 40%.

Step-up in basis: Biden’s tax plan proposes to repeal the “step-up in basis” for capital gains taxation. Under current law, inherited assets receive a tax basis step-up to their full fair market value upon death.

Updates to the CARES Act for 2021

The CARES Act of 2020 provided for relief during the COVID pandemic. While most of the benefits expired in December 2020, some carried over into 2021 and Congress extended several provisions.

The pandemic relief bill extended unemployment benefits through three programs:

  • Federal Pandemic Unemployment Compensation (FPUC): These benefits originally provided an extra $600 per week for all weeks of unemployment between April 5, 2020, and July 31, 2020. The benefits were revived at the end of December 2020 but modified to provide an extra $300 weekly benefit for all weeks of unemployment between December 26, 2020, and March 14, 2021, in addition to the benefit amount an individual would otherwise be entitled to receive under state law.
  • Pandemic Emergency Unemployment Compensation (PEUC): PEUC benefits were extended by providing 24 weeks of additional unemployment benefits to individuals who have exhausted their benefits available under state law. Extended benefits are available through March 14, 2021.
  • Pandemic Unemployment Assistance (PUA): Benefits were extended until March 14, 2021.

A second round of direct payments to individuals of up to $600 per individual and qualified child, with no cap on household size, was approved for 2021. Adult dependents weren’t eligible. The 2021 rebates were designed similarly to the recovery rebates, as they’ll be advanced tax credits based on 2019 income and start to phase out in value, beginning at $75,000 for single filers, $112,500 for heads of household and $150,000 for those married filing jointly.

The above-the-line charitable contribution was extended through 2021 at $600 for those married filing jointly and $300 for other filers. This means taxpayers will be able to take the standard deduction and deduct up to $600 in charitable giving when calculating taxable income.

Flexible spending account (FSA) balances can be rolled from the 2020 tax year into 2021, and 2021 balances can be rolled into 2022. This will help taxpayers with unused balances, such as for childcare expenses, who would normally lose the value of the FSA balance at the end of the tax year.

If you took a coronavirus-related hardship withdrawal from your retirement plans between January 1, 2020, and December 31, 2020, speak with your tax advisor about the two options available to you for tax treatment of the withdrawn amount before the April 15, 2021, tax deadline. You can either 1) recontribute the amount withdrawn within three years commencing the day after the distribution was received (basically, a rollover) or 2) include the distribution in income and elect to pay the associated federal income tax liability over a three-year period.

The CARES Act reinstated loss carrybacks that arose in tax years 2018–2020, which can be carried back up to five years. In addition, the 80% of taxable income limitation was also eliminated for 2018–2020. If you have net operating losses (NOLs) in those years, speak with your accountant to determine if you qualify to amend your prior tax returns for any potential meaningful tax refund possibilities. Businesses may use NOLs they have to fully offset their taxable income in carryover years.

Required minimum distributions (RMDs) were waived for 2020 but will be required in 2021, so be sure to schedule and take your RMDs this year.

 Capital gains under a new administration

Managing capital gains and the resulting tax exposure will continue to be a moving target as we progress through 2021 and move into 2022 considering the potential changes in tax law. There’s some uncertainty as to how the capital gains tax will be adjusted under a new administration, but there are still several best practices and considerations when contemplating recognizing capital gains:

 Tax loss harvesting and the wash-sale rules: When considering the recognition of capital gains, consider harvesting losses from losing positions and then repositioning investments in your portfolio with attention to the impact of the wash-sale rules. This may allow you to offset capital gain income; however, the wash-sale rules disallow a loss if you purchase those shares within 30 days prior to or after the sale. Any violation of the 30-day rule will prevent you from using your loss to offset future gains (and ordinary income up to $3,000 per year).

 Capital gains: In light of the potential for increased capital gains tax rates on high-income earners, consideration should be given to accelerating long-term capital gains at preferential long-term capital gain rates, if possible and depending on when any changes in the tax rates may become effective. However, there are several factors that should be considered, including the probability of a change in the tax law and the effective date, capital loss carryforwards, charitable intent, family gifting, and current and future tax brackets.

 Charitable donations: Giving appreciated securities instead of cash gives you the ability to receive a full fair-market-value deduction, subject to applicable adjusted gross income limitations, while not having to recognize the imbedded capital gain in the asset donated. The charitable organization also won’t recognize the capital gain provided it’s considered a tax-exempt organization, which many charities are.

California’s Proposition 19

Proposition 19 passed in 2020 with provisions becoming effective on February 16, 2021, and April 1, 2021. As of February 16, Proposition 19 will significantly limit the exclusion from property tax reassessment for real property transfers between parent and child. Under the new law, effective February 16, 2021, the exclusion may be applied only to the principal residence and only if the recipient occupies the property as their principal residence within one year of the transfer. It also limits the exclusion to $1 million plus the current taxable value of the property, whereas previously the exclusion was unlimited. If the market value at the time of transfer is greater than $1 million plus the assessed value, the new assessed value is the current value of the property less $1 million. The exclusion for all other real property is eliminated.

Also, as of April 1, 2021, the ability to transfer the assessed value of a principal residence for property tax calculations is expanded to statewide for those who are over 55 and disabled or affected by a wildfire or other natural disaster (as defined). The assessed value for a principal residence may be transferred to a new purchase or newly constructed residence within two years anywhere in California (previously limited to the same county or counties with an intercounty ordinance). In the case of disaster relief, the ability to transfer will only apply to principal residences (previously any type of property), and the new home must be purchased or constructed within two years (previously five years). Any value may be transferred but amounts above 100% will be added to the assessed value.

First Republic Private Wealth Management encompasses First Republic Investment Management, Inc., an SEC-registered Investment Advisor, First Republic Securities Company, LLC, Member FINRA/SIPC, First Republic Trust Company, First Republic Trust Company of Delaware LLC and First Republic Trust Company of Wyoming LLC.



The strategies mentioned in this document will often have tax and legal consequences; therefore, it is important to bear in mind that First Republic does not provide tax or legal advice. This information is provided to you “as is,” does not constitute legal advice and is governed by our Terms and Conditions of Use, and we are not acting as your attorney. We make no claims, promises or guarantees about the accuracy, completeness or adequacy of the information contained here. Clients’ tax and legal affairs are their own responsibility. Clients should consult their own attorneys or other tax advisors in order to understand the tax and legal consequences of any strategies mentioned in this document.

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