As financial planners during an election cycle, we often hear the concerns of our clients and how regulatory changes may impact their lives. These concerns have ranged from healthcare costs to business regulation to taxes. For this election cycle in particular, the top questions have centered on potential changes in taxes and how they may affect the markets. Generally speaking, we focus more on monetary policy than what color will dominate the electoral college maps on November third when considering the markets. Our country has experienced numerous changes in tax law and tax rates over the decades and the markets have generally risen regardless of who occupies the White House. With that said, it may be helpful to understand what potential changes may occur with the tax landscape should either candidate win.
Should Trump win:
- He hasn’t been as vocal as Vice-President Biden about tax changes beyond the Tax Cuts and Jobs Act of 2017, but I assume he may push to have some aspects of the TCJA made permanent. Currently, those tax cuts are set to expire after 2025. Highlights from the TCJA include lower individual income tax rates, an increased child tax credit and an increased standard deduction.
- He has mentioned “additional middle-class tax cuts” previously. This could mean lowering the Federal income tax rate of 22% on couples earning between $80,251 to $171,050 to 18% or 15%. As with the TCJA, these cuts may be subject to expiration.
- Capital gains are taxed differently than ordinary income and typically at a lower rate which currently varies between 0% to 20%. President Trump has suggested lowering the top tax rate on capital gains to 15%.
- Healthcare reforms during the Obama administration included a new tax called the Net Investment Income Tax. This new tax was meant to help pay for such reforms. The NIIT taxes certain investment income over $250,000 for those married filing jointly at an additional rate of 3.8%. President Trump may continue pushing for reforms to the NIIT. Also, changes to the Affordable Care Act or the Health Care and Education Reconciliation Act by the Supreme Court may impact this tax.
- It’s worth noting that the trillions of dollars of public debt added in 2020 due to COVID-19 congressional action may change President Trump’s stance on the changes above, especially as the US nears an interesting milestone – reaching the same level of public debt as total GDP.
Should Biden win:
- He has stated he will not raise taxes on anyone making less than $400,000 per year. For others, the top individual tax rate would increase to 39.6%. The top rate is currently 37% and was lowered by the TCJA.
- For those making over $1MM, his plan would tax investment income, such as capital gain and dividends, as ordinary income. If the top individual tax rate increases to 39.6%, investment income could be taxed at this rate.
- Also for those making over $1MM, the step-up in basis rules would change. Currently, this rule allows people to inherit certain assets such as stock or shares in a business and receive a tax benefit along with their inheritance. If changed, capital gains taxes would be due on unrealized gains for those making over $1MM. This proposal requires additional clarification given the complexity and impact on family-owned small businesses.
- Itemized deductions would be capped on income over $400,000. For someone in the current 35% tax bracket, itemized deductions may only receive a benefit of 28% (the cap rate).
- Social Security payroll taxes would apply to earned income over $400,000. This tax rate is currently 12.4% (half of which is the responsibility of employers) and only applies to income up to $137,700. This would initially create a “donut hole” effect on income between these thresholds, but would slowly close as the $137,700 is adjusted for inflation.
- For corporations, taxes would increase from 21% to 28%.
- It’s worth mentioning there are other proposed changes to tax laws, but these would serve as some of the most noteworthy. Also, the threshold of $400,000 of income is a deviation from the Obama/Biden ticket’s pledge not to raise taxes on anyone making over $250,000.
Regardless of who wins in November, the resiliency of American businesses is what makes this country great and has allowed our markets to reach new heights through both Democrat and Republican administrations. We generally do not recommend significant changes to a portfolio based on election cycles. However, based on your individual situation, this summary may help you plan appropriately for potential tax changes and estate changes. Please direct any tax or financial planning questions to TFreeman@MonetaGroup.com.
Given the dynamic nature of the subject matter and the environment in which this article was written, the information contained herein is subject to change. This is not an offer to sell or buy securities, nor does it represent any specific recommendation. You should consult with an appropriately credentialed professional before making any financial, investment, tax or legal decision. These materials do not take into consideration your personal circumstances, financial or otherwise.