By Rick Hellberg, ChFC®, CLU
Election day has come and gone, and while media outlets have called the election for Joe Biden, we are still waiting for official results. But regardless of your preferred candidate, you are probably curious and maybe a bit nervous about how things will look once we learn for sure who will be leading our country for the next four years. Let’s take a look at Biden’s proposed policies and make some observations on the impact of a Democratic win on the markets and what that might mean for your finances.
A Note On History
History can tell us a lot about elections, presidents, and the markets. And while there’s no doubt that presidential policies do impact the economy, remember that timing is just as important as who is Commander In Chief. Regardless of who was in office when, every President experienced different international conflicts, civil unrest, job market fluctuations, or societal changes that also played into stock performance.
For example, when Nixon resigned after being threatened with impeachment, there was a sharp drop in the stock market. But was that the cause? Was it dependent on what year it was in the election cycle or what party was in the House or Senate? When that event happened, stocks were already being pulled down by a global oil shock, runaway inflation, and turmoil in the Middle East. Then there’s Clinton, who also faced impeachment but didn’t experience the same situation as Nixon. Instead, the S&P 500 continued its upward trajectory in spite of the impeachment proceedings. Often it’s the timing that matters more than the name of the person in office.
Biden’s Policies And The Economy
Now that we know not to panic and take our money out of the stock market based on who wins the election, let’s look at some areas where Biden’s policies could impact you and our economy as a whole.
Taxes
If the Democrats attempt to increase taxes, both personal and business, markets could react as higher business taxes play a role in the earnings of publicly traded companies. But since COVID-19 has wreaked havoc on businesses and individuals alike (and even with a Biden win the Republicans could still hold the Senate), it’s unclear how much Biden would try to change or what bills could get through Congress.
If he can push his tax policies through, given the Democrats’ party platform, the cumulative tax proposals supported by Biden would create higher progressive tax rates than we have today.
A Return To 39.6%
Vice President Biden has proposed an increase of the top ordinary income tax bracket from the current top rate of 37%, to the top pre-Tax Cuts and Jobs Act (TCJA) rate of 39.6%. This is already scheduled to happen in 2026 when the TCJA provisions expire, but Biden’s policies would push this up to 2021 (or the soonest that his tax legislation could be implemented). (1) Along with this change, Biden would lower the income threshold at which the top rate would apply to $400,000.
He also wants to increase payroll taxes for those earning over $400,000 and have those high-income earners pay the full 6.2% on income exceeding the Social Security tax limit of $137,700. (3)
No QBI For High-Earners
The Biden tax plan also proposes to completely eliminate the Qualified Business Income (QBI) deduction for such individuals as well. Under current law, the Qualified Business Income (QBI) deduction allows various “pass-through” business owners (including owners of partnerships and LLCs, S corporations, and even sole proprietors) to deduct 20% of their business income from their business income, such that they are only taxed on the remaining 80% of their income. This effectively reduces the tax bracket for pass-through business income by 20% of the otherwise-normal tax rate.
By contrast, under the new Biden proposal, the QBI deduction would no longer be available to anyone earning more than $400,000/year, regardless of whether their pass-through business was a Specified Service Trade or Business, or not. And because the QBI phaseouts have in the past been determined based on an individual’s own tax return, ostensibly even if one or multiple businesses all stayed under the $400,000 threshold, as long as the business owner’s income reaches or exceeds the threshold, the QBI deduction would be lost, even if the income threshold was breached due to non-business (i.e., other wage or portfolio) income!
Capped Deductions
Biden’s tax plan proposes to cap the value of itemized deductions at no more than 28%, impacting those in the 32%, 35%, 37%, or the proposed “new” 39.6% bracket.
New And Improved Tax Credits
Vice President Biden’s tax proposals are further bolstered by an array of new and expanded credits, primarily targeted at lower- and middle-income households where they are most commonly utilized.
Such personal tax credits include:
- Child tax credit: The current credit of $2,000 per child under age 17 would be increased to $3,600 for children under age 6, and $3,000 for all other children under age 17.
- Child and dependent care credit: The current credit of a maximum of $3,000 for one child, and $6,000 for two or more children would be expanded to a refundable credit of $8,000 for one child, and a whopping $16,000 credit for two or more children.
- First-time home buyer credit: A new refundable and advanceable credit of up to $15,000.
- Caregiver credit: A new credit of up to $5,000 would be created to assist individuals who provide informal care to those in need of long-term care. (4)
Increase Long-Term Capital Gains Tax
In addition, Biden has proposed changes to the rates at which long-term capital gains and qualified dividends are taxed. Long-term capital gains are the gains earned by investments that have been held for over one year. For those earning over $1 million, Biden wants to replace the current preferential 20% capital gains tax rate with the regular income tax rate at his proposed 39.6%. This could lead to some selling before the higher rate becomes a reality, but it may be a long shot if we have a divided Congress.
A Blow To Heirs
Another of Biden’s proposals is to eliminate the tax benefits of investments bequeathed to heirs upon death. Currently, when an investment or piece of property is passed to an heir, it receives a step-up in tax basis to current market value at the date of death of the owner. This means that no taxes are due on the gains that are earned between the time the original owner purchases the investment and their death. The heir only pays taxes on gains earned after they inherit the investment. Biden’s proposal would tax all capital gains at death, effectively ending the step-up in basis.
Regulation
Increased regulation under a Democratic government could impact the finance industry as well as the energy section, especially oil and gas companies because of a stronger focus on alternative energy. It’s unlikely we’ll see anything resembling “Medicare for All” from a Biden administration, but we could see some expansion of the Affordable Care Act. (5) We all know that trade has been a hot-ticket issue under President Trump, especially with China. This uncertainty can often lead to supply chain issues, which can then lead to higher costs for businesses. Under Biden, trade issues may not be as volatile.
Local And State Governments
Biden may place more attention on local and state governments, including tax deductions, and COVID-related support, which could lower municipal bond default risk.
Still Have Questions?
Regardless of who sits in the Oval Office for the next 4 years, you need a plan for your money now more than ever. Whether the markets face risks from politics, COVID-19, or international issues, sticking to a long-term plan built on your goals and your life circumstances will help you mitigate risk and stay level-headed in times of uncertainty. If you want to know more about how to set up your money to succeed no matter what happens, we at PeterAlexander are here to help. Reach out to us at 610.940.1441 or info@peteralexanderinc.com to set up an appointment.
About Rick
Rick Hellberg is president and CEO of PeterAlexander, a financial planning firm founded in 1991. Rick is passionate about providing quality, objective financial solutions so his clients can pursue their financial goals and create the legacy they desire. He strives to equip his clients with comprehensive financial services and advice so they can be empowered to make sound financial decisions. The plans Rick and his team develop help their clients to reduce their taxes, educate their children, fund their retirements, pass their businesses on at fair value, and create programs to attract and retain valuable employees, all so that they can focus on what matters most to them. Rick has a bachelor’s degree in liberal arts from Penn State, along with the Chartered Financial Consultant® (ChFC®) and Chartered Life Underwriter (CLU) designations. He has spent over 40 years working with successful individuals and designs tailored solutions to meet his clients’ unique needs. Rick resides in Philadelphia with his lovely wife, Lisa, and their two Shiloh Shepherds, Bentley and Winston. He is also the very proud father of two wonderful young men, Peter and Alex. In 2010, Rick ran for Congress in the 2nd District of Pennsylvania and has stayed active in local politics. To learn more about Rick, connect with him on LinkedIn.
______________
(3) https://www.cnbc.com/2020/08/17/whats-ahead-for-your-taxes-if-biden-wins-the-election.html