Positioning Your Finances for the Biden Administration
The election that dominated the concerns of many Americans this year is finally in our rearview mirror. Now it is time to look forward and try to determine what a Biden administration will mean to your finances.
First, a few words of reassurance that would have applied even if the Trump-Pence ticket had won the election:
- The market plays no political favorites. It has not prospered under one party’s administration or wilted under another’s.
- The main drivers of the market are economic and earnings growth, both of which are often driven by external factors, as opposed to who is in office.
- Stocks generally rise over time, no matter who sits in the Oval Office.
What Can We Expect?
A divided House and Senate with narrow majorities in each will make passing any sweeping changes in taxes difficult to enact. These are some of the items that featured prominently in the Democrats’ platform. It is likely that some could be scaled back in scope and others will be put on the back burner until after the midterm elections in 2022:
- Tax rates could increase for people with income over $400,000. How much will they increase? The top marginal tax rate could revert from 37% to 39.6%, the rate in force before the passage of the Tax Cuts and Jobs Act of 2017.
- Long-term capital gains, which are now taxed at 20% for high- bracket taxpayers, may be taxed at the top marginal tax rate (39.6%) for those earning more than $1 million.
- 401(k)s and other retirement plans could be subject to new contribution rules. Currently, your contributions are made with pre-tax dollars, so that a participant in the 37% tax bracket can shave $370 off his or her taxable income for every $1,000 contributed to the plan. A participant in the 25% bracket is only able to reduce his or her taxable income by $250 with each $1,000 contribution. A change in the rules would level the playing field and provide every participant with a 26% credit, thereby enhancing the tax advantages for low-bracket taxpayers and reducing the benefit for their high-bracket counterparts.
- The lifetime estate tax exemption, which was raised to $11.58 million by the Tax Cuts and Jobs Act, could revert to its previous $5 million level.
- Inherited assets may no longer be eligible for a step-up in cost basis.
- The child tax credit of $16,000 for two or more children could be increased to $8,000 per child.
- Social Security payroll tax may be imposed on wage income over $400,000.
- The corporate tax rate could be raised to 28% and the Alternative Minimum Tax still applies to profits over $100 million.
What About the Market?
One relatively common assumption that has emerged in the months leading up to the election is that a number of the measures on the Democrats’ platform will not be good for the stock market. As climate policy and privacy laws evolve, for example, we could be seeing increased regulations in the energy and technology sectors. In addition, the corporate tax rate may be increased from 21% to 28%.
At the same time, however, we envision two key pluses under the Biden administration that could buoy stock prices and perhaps push them higher:
- Easier trade policy
Under the Trump administration, the US maintained a tough approach on China and imposed substantial tariffs on traded goods. China quickly followed suit. Under the Biden administration, we expect an equally tough approach, but we can also see a rollback of tariffs that would facilitate trade greatly, especially in today’s challenging pandemic economy.
- Increased stimulus spending
This one comes with a big “if.” If the Democrats had won both the Senate and Congress, we would have expected passage of a stimulus bill that would exceed $2 trillion. Given the election result, we can’t help being less optimistic. Still, we expect agreement to be reached on some sort of stimulus spending. The resulting effect on the economy could lift equity prices, even in an environment of higher taxes and more stringent regulations.
What Should You Do?
Keep in close touch with your Lenox Advisor, especially over the next several months. Now is not the time to make emotional decisions that you might regret later. As policies become clearer, you can count on us to keep you informed.
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