Planning for a Biden Administration
Former Vice President Joe Biden is projected to secure the 270 electoral votes needed to make 1600 Pennsylvania Avenue his home for the next four years. With a new administration comes new policies.
Should you make changes to your finances based on the perceived implications?
Tax proposals
Perhaps one of the biggest questions on investors' minds is the impact of Biden's proposed tax plan - some of the key proposed features include:
- Repealing the Trump tax cuts (currently set to expire in 2025)
- Increasing income tax rates, generally on incomes above $400,000
- Increasing long-term capital gain tax rates from 23.8% to 39.6% on incomes above $1,000,000
- Limiting itemized deductions to 28% of income (potentially including retirement account contributions)
- Eliminating the stepped-up basis rule
- Making death a 'realization event' (with several tax consequences as if you had sold the asset during life, then passed it to your beneficiary)
- Decreasing the estate tax exemption
- Creating a new 12.4% Social Security tax on incomes above $400,000 (split between employers and employees)
- Increasing corporate income tax increase from 21% to 28%
- Elimination of the Qualified Business Income (QBI) deduction on certain business owners with incomes above $400,000
Will the proposals become law?
Our guess is that the focus over the next few weeks and in 2021 will be (1) Coronavirus relief, then (2) healthcare and/or environmental policy reform, followed by (3) tax reform. However, the timing is less important since bills are often passed at year-end that can affect the entire calendar year.
For now, keep in mind that to pass new legislation, especially a tax increase, both the House of Representatives and the Senate need to pass a bill –a divided Congress could constrain this. [updated January 20, 2021: Democrats are expected to maintain control of the House of Representatives. Democrats are also expected to gain control of the Senate by virtue of Vice President Harris’ constitutional power to cast tie-breaking votes.]
If changes do happen, they aren’t immediate. You not only have time before year-end to consider the impact, you can often see changes coming. Even if you don't know their final form you can get an idea of the direction and focus.
However, even if you have perfect insight it is impossible to predict the end-effect. Be careful not to put too much emphasis on one outcome.
For example, Presidents Ronald Reagan and George W. Bush implemented tax cuts during their administrations. If you had invested $100 in the S&P 500 at the start of each of their administrations, it would have grown to $324 under Reagan and declined to $70 under Bush. In 2013, the Bush tax cuts expired for those making more than $400,000, in effect, this was a tax increase on income above that range. The S&P 500 increased in 2013, 2014, 2015, and 2016; highlighting that the tax increases did not cause a market collapse, a worry that many investors have during times when we experience tax hikes.
We encourage caution and patience when extrapolating the impact of tax policy on personal finances.
Political policy & Investment policy
Often when a new administration comes into office there are plenty of opinions and prognostications around which sectors will perform best, leading some to make tactical changes.
President Trump’s most recent 4-year term serves as an example of the difficulties of making sector forecasts based on who is in the Oval Office. Energy and financial stocks were viewed as the best bets under a deregulatory Trump administration, yet they’ve been the worst sectors since 2016.
While US presidents may have an impact on market returns, so do hundreds, if not thousands, of other factors—the actions of foreign leaders, a global pandemic, interest rate changes, rising and falling oil prices, and technological advances, just to name a few. The combined impact of millions of investors placing billions of dollars’ worth of trades each day based on the perceived impact of these factors results in market prices that incorporate the collective expectations of those investors. This makes consistently outguessing market prices very difficult.
While it may feel natural to draw a connection between the administration in power and the impact they may have on markets, shareholders are investing in companies, not a political party. Companies focus on serving their customers, helping their businesses grow, and generating profits, regardless of who is in the White House.
READ MORE HERE ON MARKET RETURNS UNDER DIFFERENT US PRESIDENTS AND CONGRESSES
Making investment decisions based on the outcome of elections, or how investors think policy changes may unfold, is unlikely to result in reliable excess returns. On the contrary, it may lead to costly mistakes.
Accordingly, there is a strong case for investors to rely on a consistent approach to asset allocation—making a long-term plan and sticking to it.
What can you do now?
A balanced, patient approach is encouraged.
Here are a few measured actions that we've considered for clients with the remainder of the year:
- Accelerating income or deferring business expenses
- Converting an IRA or 401(k) funds to Roth
- Harvesting investment gains
- Accelerating itemized deductions
- Accelerating gifting to family and loved ones
- Using a SLAT: A Spousal Lifetime Access Trust
- Accelerating charitable gifts or pre-funding future decades of gifts
Regardless of the direction of tax policy, consider that there are always opportunities to improve your finances, from Keeping More of What You Earn to smart homeownership and mortgage financing.
If your investments didn't get the results you wanted this year, consider reviewing an updated version of our “fire drill" list of 10 investment actions to take, published while markets were tanking in in late February 2020.
Thankfully, there’s hope the load will lighten in the new year, fast approaching. While we all prepare for a fresh start, here are six financial best practices for year-end 2020 and beyond, none of which require any heavy lifting.