Tax planning for a Joe Biden presidency

After every presidential election, attention turns to changes the new president wants to make to the tax code and how that may affect financial markets, as well as our clients’ specific financial situations and tax planning.

With the results of the Senate still to be determined, uncertainty reigns. Still, there are a few things we can consider when contemplating what, if anything, our clients need to do.

There have been many differences between what a candidate wants to do with the tax code and what actually gets implemented.

The first thing to keep in mind is that presidential candidates run on a high-level tax policy, not specific legislation. The President does not write our laws, Congress does. There have been many differences between what a candidate wants to do with the tax code and what actually gets implemented. The most recent example was President Trump. He had the help of a clear majority in both houses of Congress, yet still could not get all the provisions he wanted into tax legislation.

It will be even more difficult for President-elect Biden to achieve all the items on which he campaigned. If a Republican wins either of the two Georgia Senate races, sweeping changes are highly unlikely because Republicans will have a majority in the Senate. However, even if both seats are won by Democrats (resulting in essentially a 50/50 split in the Senate), big changes remain unlikely.

Some of the provisions President-elect Biden campaigned for include:

    • A new 12.4% social security tax on incomes above $400,000 (split between employers and employees)
    • Raising the marginal tax rate on incomes above $400,000 to 39.6%
    • Corporate income tax increase from 21% to 28%
    • Repeal of the Trump tax cuts (currently set to expire automatically in 2025)
    • Long-term capital gains rate increase from 23.8% to 39.6% on incomes above $1,000,000
    • Limiting itemized deductions so they can only offset income taxed at 28% or less

Of the above list, only the repeal of the Trump tax cuts would increase taxes on the middle class directly. The clear theme is to increase taxes on high earners. This targeting may present another barrier to change, in addition to the vote counts in Congress.

It is likely that economic conditions due to the efforts to contain COVID-19 will remain poor. Many economic advisors will advise Biden and Congress against making a significant shift in tax policy. Pulling more money out of an economy that is struggling can make matters worse, especially since so many of the provisions target businesses which create jobs.

There is a good possibility that between the vote count, the economy and other legislative priorities, the tax code will not be addressed in earnest until at least 2022.

Tax increases and market behavior

The simple, often repeated narrative is low taxes boost markets and high taxes hurt markets. In yet another example of how markets often do not conform to simple narratives, the historical behavior of the markets after a tax code change is mixed. Recent presidencies give us several examples.

Tax cuts were implemented during the administrations of Presidents Ronald Reagan and George W. Bush. The Reagan years were strong for markets, but the Bush years were weak and included two significant declines.

…despite what the simple narrative suggests and the worry we hear from some clients, recent tax increases did not cause a market collapse – quite the contrary.

Similarly, despite what the simple narrative suggests and the worry we hear from some clients, recent tax increases did not cause a market collapse – quite the contrary. Taxes were increased during the Clinton administration, but markets soared in the ‘90s. Likewise, in 2013, the Bush tax cuts expired for high earners and the S&P 500 index of U.S. stocks increased over 32% that year and had positive returns every year after until 2018.

If you are reading about these outcomes and thinking “Yeah, but during that administration such and such happened,” you are correct. You are alluding to a very important point – namely, more goes into creating moves in the markets than just tax policy. Economies and markets are simply too complex to be forced to and fro by one variable for very long.

Since the time frame of a true investor extends beyond the term of any president, you should conclude that making significant shifts in your investment approach based on what is said during a campaign or changes to tax policy after an election is risky. Like market timing for other reasons, the odds of success are not good and the penalty for being wrong can be severe.

Who should make changes and what should they be?

A cornerstone of tax planning is to consider whether income or deductible expenses should be either accelerated into the current year or deferred into a future year. If taxes are going up, you look to see what income can be put on the books in the lower tax year and which deductions can be delayed to the higher tax year. Tax proposals do not change the wisdom of doing this, but legislation can affect the numbers used in the analysis.

tax planning after an electionMost people are not considered highly compensated under the Biden proposals and should not be overly concerned about direct increases in their tax bills. We do not believe the proposals present a compelling reason to make any major tax-related moves at this point or abandon a sound investment plan.

For the highly compensated, considering the thin margin the prevailing party will have in the Senate, it does not appear likely the significant tax increases listed above will pass as proposed for 2021, and 2022 may be difficult too. Nonetheless, as more clarity around the vote count in the Senate appears and as support or lack of support for specific proposals arise in Congress, we should be prepared to act.

What we will likely recommend is to accelerate income or capital gains into the tax year prior to passed tax increases becoming effective. We mentioned several reasons it will be hard for Congress to pass legislation with big changes right away. It will likely be even harder to make any increase retroactive.

Though we would never guarantee anything when it comes to guessing what Congress will do, we should have time to plan for tax code changes. The best bet is to stick with your financial plan, stick to the tried and true methods of tax planning, and do not get too wound up over simplistic narratives espoused by politicians or the media. Diversification, patience, and discipline have proven their worth through many tax code changes and should again in the coming years.

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Moisand Fitzgerald Tamayo, LLC is an Orlando, FL and Melbourne, FL based fee-only financial planner serving central Florida and clients across the country. Moisand Fitzgerald Tamayo, LLC specializes in providing objective financial planning, retirement planning, and investment management to help clients build, manage, grow, and protect their assets through all phases of one’s life and the many transitions in between.

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About Dan Moisand

Dan Moisand is a fee-only financial advisor with Moisand Fitzgerald Tamayo, LLC. He is a regular contributor for multiple outlets, including Florida Today, MarketWatch, and The Wall Street Journal. His writing and financial advice have also been featured in Financial Planning, Investment Advisor, Wealth Manager/Advising Boomers, Forbes, Smart Money, and The New York Times, among other publications. He is the only two-time winner of the Journal of Financial Planning’s “Call for Papers” competition and has been named a top financial planner and advisor by multiple publications. Investment News named Dan one of the “twenty most influential men and women” in the history of financial planning. He currently serves on the Board of Directors for the CFP (Certified Financial Planner) Board.

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