Assessing 2020 Election Results on Existing Tax Policy
October 30, 2020
The following piece is not intended to be a political commentary, nor an endorsement of either Presidential candidate or their agendas. The information below is intended to provide general perspective based on a number of sources and experts. To discuss your specific circumstances, please contact a member of Cape Cod 5’s Wealth Management team.
The 2020 Presidential election is being conducted at one of the most divisive points in modern U.S. history. Accordingly, the two candidates, Donald Trump and Joe Biden, have announced very different tax policies if they are elected. Changes to the existing tax code are understandably concerning, especially given the uncertainty that an election year brings. Cape Cod 5 would like to offer some guidance regarding how to best navigate possible changes to the tax environment.
Approach: We have laid out three possible election outcomes and the proposed tax policy that may result from each. We will also offer possible actions in 2020 that could benefit clients and investors financially before new tax laws are enacted in 2021. The four potential outcomes are:
1. Status Quo – Trump remains President with a Republican Senate and Democratic House
2. Red Wave - Trump remains President with a Republican Senate and Republican House
3. Biden President – Biden becomes President with a Republican Senate and Democratic House Democrat
4. Blue Wave – Biden becomes President with a Democratic Senate and Democratic House
From the advisor perspective, this is the simplest outcome to navigate. Trump has not proposed any tax increases and, in fact, has mentioned further tax cuts. There have been no specific proposals from Trump, but he has called for the 2020 deferral of payroll taxes to be forgiven. The deferral of payroll taxes had no impact on most clients. If the status quo is maintained, generally speaking, there is nothing foreseen at this time that needs to be done in 2020.
Even more than the status quo scenario, though much less likely in terms of probability, this scenario would ensure no changes to the 2017 Tax Cuts and Jobs Act and may even open the door to further corporate and individual tax cuts. However, there has been nothing substantive proposed, and it remains to be seen if Republicans – who are historically averse to large Federal deficits – would support further tax cuts in the face of a rapidly escalating national debt.
This scenario, though perhaps most favored by the stock market as it ensures some gridlock, leaves us with the most uncertain outcome regarding tax reform. If the Senate stays solidly Republican, then Biden would need to make some concessions to his proposed tax policies if he wants to ensure they get passed. Here are the Biden tax changes that have been set forth that would have the greatest impact:
- Increase Federal income tax rates for families making more than $400,000
- Long term capital gains and qualified dividend rate on those earning over $1M going from 20% to 39.6%
- Ending the “step-up” in cost basis of assets at death and applying the Canadian approach to taxing the appreciation on assets at death at capital gains rates
- Accelerating the sunset of the Tax Cuts and Jobs Act (TCJA), which in part, would increase tax rates, reduce the Federal estate tax exemption amount and the standard deduction amount, and eliminate the deduction limits on SALT (State and Local Tax) deductions
- Increase of corporate tax rate from 21% to 28%
As a Biden presidency puts these policies in play, we must consider their enactment a possibility, even with a Republican Senate. We will consider the impact of these policy changes in the “Blue Wave” scenario, but realize they come with a lower probability of passing without full Democratic control.
In the event of full Democratic control of the Presidency, the House and the Senate, we have a good chance of significant changes to the tax code. These changes specifically target both corporations and higher income individuals. Most tax experts think any changes to the tax code would be unlikely to take effect until 2022. However, there is a possibility of retroactive enactment as early as January 2021. Earlier we mentioned the most impactful proposed tax changes. If these changes are enacted, then the following actions should be considered:
- Increase gifting during lifetime to reduce estate taxes and capital gains tax on unrealized capital gains at death
- Consider Roth IRA conversions to better control taxation of retirement assets
- Accelerate the realization of ordinary income and capital gains now as future years will most likely be higher
- Consider a QCD (Qualified Charitable Distribution) from an IRA to reduce taxable income
Our Wealth Management team will continue to monitor conditions and outcomes and their potential impacts as we move forward into the election and beyond. As always, please call us with any questions at 877-409-5600.
These facts and opinions are provided by the Cape Cod 5 Trust and Asset Management Department. The information presented has been compiled from sources believed to be reliable and accurate, but we do not warrant its accuracy or completeness and will not be liable for any loss or damage caused by reliance thereon.
Jason R. Lilly, CFA, CFP®, Chief Wealth Management Services Officer
Michael S. Kiceluk, CFA, Chief Investment Officer
Brad C. Francis, CFA, Director of Research
Lee C. Gatewood, Senior Investment Officer
Jonathan J. Kelly, CFP®, CPA, Senior Investment Officer
Sean F. McLoughlin, CFP®,CIMA, Senior Investment Officer
Robert D. Umbro, Senior Investment Officer
Kimberly K. Williams, Senior Wealth Management Officer
Craig J. Oliveira, Investment Officer
Christopher E. Chen, CFA, Investment Analyst
These facts and opinions are provided by the Cape Cod Five Trust and Asset Management Department. The information presented has been compiled from sources believed to be reliable and accurate, but we do not warrant its accuracy or completeness and will not be liable for any loss or damage caused by reliance thereon. Investments are NOT A DEPOSIT, NOT FDIC INSURED, NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY, NOT GUARANTEED BY THE FINANCIAL INSTITUTION AND MAY GO DOWN IN VALUE.