It has been a year of many twists and turns. For the past couple of months, we have watched both President Donald Trump and presidential candidate Joe Biden prepare for the coming election. We watched as former Vice President Biden picked his running mate, which told us what path the Democratic Party is determined to take.
Now the far leftists are in control of the Democratic Party. Should the Democrats win this election cycle, there’s a very good chance we’ll see higher taxes. Corporations can expect higher taxes as soon as the Biden Administration sets up shop. Much of the general public can expect higher taxes as they rescind the Trump tax cuts.
As reported by the Wall Street Journal, Biden has already stated he plans on raising taxes on the wealthy. According to him, “wealthy” is a married family of two with an income of $78,000 or more. His plan is to increase the tax on this class from a rate of 12% to 25%, or more for higher earners. On top of that, Biden wants to raise capital gains from 30% to 39.6%. In an August 11, 2020, Wall Street Journal opinion piece, Ed Finn says, “Get ready for a stock market plunge of possibly 10% or greater if Mr. Biden moves into the White House.”
Back in the 1990s, Bill Clinton became the first president in history to sign a tax bill that raised taxes retroactively. This covered the six months before he took office. So, we know an incoming Democratic president is going to go to work immediately to push through their tax “promises.” But it doesn’t end there. We also have many baby boomers who are not at the peak of their retirement program and many workers who are pouring their savings into mutual funds at record levels. With this in mind, Finn goes on to state that annual returns in the stock market, even with higher taxes, have the possibility of 15% or greater returns.
We also have a generation of young people who have never seen peace. They see their country fighting some sort of battle somewhere in the world — sometimes even in their own country! This is all a lot of doom and gloom. Here are a few more things to consider, as well: Right now, the U.S. is the top oil producer. We are also home to the top 25 brands in the world. New regulations in manufacturing are bringing personal protection equipment and prescription drug manufacturing back to U.S. soil. Jobs are coming back. It’s not all doom and gloom.
So, what road should investors take? Well, volatility will be the new norm, ranging from half a percent to 3% swings. This is daily. In order to lower the tax burden on retirees, it’s important to take advantage of any current tax breaks as much as possible. Think about doing an IRA to Roth IRA conversion or using your required minimum distributions (RMD) as financial donations to charities (if that income is not needed).
Also consider that there are diminishing capital gains in higher income brackets. Look for tax deferral programs. And, finally, be prepared to take advantage of market swings. This means the buy-and-hold atmosphere in the short term of a potential Biden administration will most likely NOT be a successful investment strategy. Instead, focus on opportunities to move assets based on market movement. A flexibility of investments between qualified investment choices — and staying under tax thresholds — is more important than ever.
Looking ahead, keep in mind that we have reviewed other tax strategies to include family foundations, life insurance, and other tax-saving vehicles. But until the final votes are tabulated, all of these are still on the backburner. It’s important to note that if President Trump is reelected, there will be other tax ramifications to be aware of — including the expiration of Trump’s tax plan (which isn’t until 2025). But we will have a few more years to take advantage of this, along with other strategies. For now, stay tuned as we await further news from both campaign headquarters. It’s going to be a bumpy ride, at least for a while.
In the meantime, if there is one thing to think about as we enter the peak of election season, it’s that taxes on baby boomers will possibly be among the highest in history, falling only behind the tax rate during World War II when tax rates reached 95% in order to pay for the war.