Article

The 2020 Elections And Your Financial Plan


Oct. 1, 2020

The 2020 elections are a little more than a month away, and the outcomes in the ‘battleground states’ and Senate remain very much in doubt. Many polls show former Vice President Joe Biden with a narrow overall lead over President Trump, but, as we learned in 2016, election results are unpredictable.

A close election and Biden victory could also mean that the Senate remains in Republican hands. This outcome would serve as a check on left-leaning policies. A larger margin of victory, however, has the potential to move the needle enough for Democrats to take control of Congress’s upper chamber. One thing is for sure, a lot can happen between now and November.

Each candidate will focus on restarting our economy and restoring jobs that were lost to the pandemic, and tax policy will certainly play a key role. Having an understanding of each candidate’s plan to stimulate the economy, anticipating the potential planning impacts, and gauging the likelihood of major policy changes requires careful attention and thought.

Individual Taxes

At its most broad level, President Trump would prefer to lower taxes whereas Vice President Biden would prefer to raise taxes.

Trump has released a broad second-term tax agenda, although it is light on detail. For individuals, plans include expansion of opportunity zones, a form of capital gain tax relief achieved by investing in distressed areas through qualified opportunity funds, as well as a ‘middle-class tax cut’ to boost take-home pay. Furthermore, while not formerly established by his campaign, Trump has voiced his desire to reduce the maximum capital gains tax rate from 20% to 15% and ‘index’ capital gains with inflation.

As for Biden’s proposals, individuals with higher incomes may see increased income and payroll taxes, while those in lower tax brackets will likely see little to no change in their tax bill. Specifically, he has proposed repealing parts of the Tax Cuts and Jobs Act of 2017 (TCJA) by restoring the 39.6% top marginal tax rate (currently 37%), phasing out small business income deductions over $400,000, capping itemized deductions with a 28% limit, reinstating the ‘Pease Limitation’, and taxing capital gains and dividends as ordinary income for individuals with incomes over $1,000,000.

Furthermore, Biden’s plan would create a ‘donut hole’ in the current Social Security payroll tax system, where wages below $137,700, the current wage cap, and above $400,000 will be subject to Social Security payroll taxes.

It is also worth mentioning that Biden has proposed restrictions on certain tax preferences for the real estate industry. The proposals include disallowing some losses against income and limiting 1031 exchanges, a tax-deferment strategy for real estate held as an investment. 1031 exchanges allow investors to defer paying capital gains tax on an investment property if the proceeds are used towards a “like-kind” purchase, permitting owners to reinvest real estate capital several times without paying taxes on the gains.

Business Taxes

After passing the TCJA in his first four years, President Trump’s second term agenda is much lighter on business tax proposals. We assume that his broader aim is merely to continue his current business tax policies with a particular emphasis on ‘ending our reliance on China’. Proposals include using targeted tax credits for ‘Made in America’ companies and allowing full expensing of deductions for essential industries, such as pharmaceuticals and robotics, should they bring jobs back to the US.

Biden’s plan would look to reverse a portion of the corporate tax cut under the TCJA by raising the top corporate tax rate from 21% (originally 35% before the tax cut) to 28%. Biden has called for limits on the use of popular tax breaks by imposing a 15% minimum tax on companies’ book income (profits before deductions) of $100 million or higher and doubling the tax rate on global intangible low tax income (GILTI) earned by foreign subsidiaries of US firms from 10.5% to 21%.

Estate Planning

The TCJA temporarily doubled the federal estate and gift exemption amount established in 2011 from $5,000,000 to $10,000,000 per person. Indexed for inflation, the 2020 amount is $11.58 million per person ($23.16 million per couple). As of January 1, 2026, this is scheduled to revert to the 2017 figure of $5,490,000, indexed for inflation. Trump has expressed support for making this change permanent.

On the other hand, Biden has set his sights on large estates as a way to boost tax revenue. While Biden has not explicitly called for reversing the increased estate and gift tax exemption, already set to expire at the end of 2025, he has taken a different approach by calling for the elimination of the ‘step-up’ in cost basis at death.

At the moment, individuals who pass property or stock to their heirs receive a ‘step-up’ in basis equal to market value as of the date of their death. This can virtually erase any built-in capital gains for heirs if they decide to sell immediately. Eliminating the ‘step-up’ can create a meaningful tax event and requires careful planning for owners of highly appreciated assets.

Planning Ahead

Regardless of what is said on the campaign trail, tax policies can take months or years to reach the final stages and become law, especially during the current economic downturn where higher taxes could impede the recovery. Not every policy a candidate intends to put into place will work out.

For those anticipating a Trump victory, their current financial plans should remain viable, while those assuming a Biden victory may want to consider recognizing long-term gains sooner than anticipated, accelerating income that may be subject to higher Social Security taxes, and bringing forward itemized deductions, such as charitable giving, to avoid any limitations on those deductions.

Furthermore, high-net-worth individuals should explore utilizing the temporarily increased federal estate exemption before it is gone. Starting the conversation now while having your estate documents in order and ready for execution for when the election results are known can put you a step ahead.

Above all, we encourage clients and investors to stay abreast of the policy platforms of each candidate without upending their entire plan based on one outcome or the other. In terms of your own financial plan, establishing a focused, long-term plan while avoiding reactive, emotionally-driven decisions based on election results is where the real opportunities and growth lie. Focusing on what you can control – long-term investment positioning, estate planning, budgeting, etc. – will allow you to react rationally and quickly when opportunities emerge. Finally, it is impossible to know the potential longer-term impact that different tax policies can have on the broader economy, which further highlights the need to apply a flexible, active approach within your financial plan.

At Manning & Napier, a key aspect of our job is to advise clients on proposed or enacted tax policies, highlighting key provisions that can impact investments and planning considerations. We work closely with clients to build this information into our annual planning services to help clients understand and navigate the tax landscape to stay on track and focused on achieving their goals.

Consult with an attorney or a tax or financial advisor regarding your specific legal, tax, estate planning, or financial situation. The information in this article is not intended as legal or tax advice.

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