Election Day has passed and at this time, Joe Biden is the president-elect. The House of Representatives remains Democratic, and Senate remains Republican. If you review what has happened in the market historically, the better rates of returns have occurred during split government sessions. Compromise becomes more common because each side knows they must work with the “other side” to get anything done rather than thinking their way is the only way.
The pandemic compounds the problems going into 2021. Low-interest rates have been great for the borrowers among us. They have not been so good for the savers among us. The stimulus payments issued back in the Spring were needed by many and was an unexpected windfall for others. We cannot be sure if another one is coming. The likelihood is yes, in some manner or another, there will be a stimulus payment, which, while needed, will also increase the government debt load.
With increased unemployment, the pandemic has also forced many individuals into retiring earlier than anticipated. This has put a more significant strain on the Social Security system. The date for action to allow the system to remain solvent has been pulled back to an earlier time. Some estimates are saying as early as 2029 rather than 2034.
Several other factors can be cause for concern. What is going to be the impact on employment once we are through the PPP business loan forgiveness period? For many small businesses, employment needs to be maintained through December 31 to avoid paying back the loans. If business has not gotten back to normal by the first of the year, are we looking at an increase in unemployment after January 1?
The federal reserve policy has been keeping inflation artificially low. Many are concerned about the federal government’s ability to walk the line between increasing inflation at a rate that does not depress the economy.
What actions should you take based on the election results? For those of you wanting investment recommendations, this is not any different than normal.
Determine if you are still within your desired risk tolerance. Has anything changed in your personal life that would require a change? Has retirement occurred sooner than anticipated? Are expenses higher than usual because of children returning home? Has there been a loss of income because overtime income or travel pay has gone away? Have I been unable to work a 2nd job, or has income from my 1st job decreased?
If your financial situation has not changed, and there is no justification for changing your risk tolerance, we recommend making no changes. If you are in actively managed accounts, the money managers or strategists are increasing cash if they feel it is appropriate. They are taking advantage of buying opportunities.
If you have funds that you want to invest, consider dollar-cost averaging and put funds in over time rather than making a significant investment in a single day. This allows you to take advantage of the market’s various price points being up and down rather than potentially purchasing all on one day when the market is at a high.
If you see a dip in the market, take advantage and fund your IRA for the year at a lower per-share price. Consider doing a Roth conversion for the year. Avoid selling stocks while the market is down, if possible. Since you would have to sell more shares to get the dollar amount you need, it can be harder to get back to even since there are fewer shares to take advantage of a share price increase.
With the anticipated change in the presidency, we want to consider potential tax law changes and what you might want to do in preparation. First, realize that these are the proposed changes that the president wants, and what becomes the new law can be quite different. This can be especially true when there is a party split within the government branches.
Some of Biden’s proposed changes are:
- Increasing the top marginal tax rate to 39.6% for those with income over $1 million.
- Increasing taxes on those making more than $400,000 by capping their itemized deductions at 28% of their value.
- Get rid of the SALT cap: currently, state and local taxes are capped at a maximum of $10k. Doing away with this means many New Yorkers would now be able to claim the full value of our property taxes and state income taxes rather than being subject to the current $10k limitation.
- Social Security tax deduction currently stops when wages or self-employment income hits $137,700 (up to $142,800 in 2021). The proposal holds to the same wages to stop Social Security tax being paid in AND also restarts it when wages or self-employment income exceeds $400,000.
- Capital gains are currently taxed at a lower tax rate than ordinary income. Depending on your income, capital gains are taxed between 0% and 20%. The proposal is for anyone earning over $1 million to have their capital gains amount taxed the same as ordinary income, potentially making that tax rate be 39.6%
Again, we cannot know if any of these will become law. If you believe they will and your income is in the range where it could be impacted, you should take advantage of some tax planning opportunities. Accelerate income into 2020 for a lower tax rate this year. Pull wages or self-employment income into this year. Recognize non-qualified stock options in 2020. Consider cashing stock with long-term capital gains during 2020 to recognize the gain at lower tax rates. Consider a charitable remainder trust for appreciated assets rather than selling them. Accelerate deductions into this year if you are in the higher tax brackets and may be subject to the 28% limitation. Push deductions into 2021 if you are in the lower tax brackets and could potentially itemize in 2021.
With year-end coming, many of the standard tax planning moves need to be considered. Look for future posts containing recommendations for actions to take before year-end.