As I write this, the election results are not yet perfectly clear. But we have enough visibility into probable outcomes that we can begin to divine possible policy changes in the next couple of years.
Leading up to the election it became apparent that the Senate was the real contest. And it looked like the Republicans were going to have a hard time holding on there. As I write this, it appears that the GOP’s current 53-47 advantage could slip to 52-48 in January. Not much of a change, as they held onto hard-fought seats in Iowa, North Carolina, and most surprisingly, Maine.
So it appears we will enter 2021 with a divided government, which is the way the economy and markets tend to like it. While there are undoubtedly many variables impacting equity market performance, a split federal government has, over the decades, produced the strongest returns. In fact, since 1933, the executive/legislative branch division that has produced the highest average equity market returns has been a Democratic president and a split Congress. So we’ve got that going for us!
What does this change mean for investment advisors and financial planners? The Biden tax plan offers some clues, but a GOP-controlled Senate would ensure that plan is, at best, compromised.
The
With that groundwork laid, let’s dive into some specific issues and what we might expect from the Beltway in the next couple of years. Much of this is based upon the published Biden tax plan. The odds of any of this happening depend mostly upon whether both parties are willing to "crack open the tax code" — a heavy lift. If that does happen, look for compromise; I don’t envision any of these coming to pass as proposed.
The Biden tax plan calls for:
· A return to the 39.6% tax rate on incomes over $400,000
· An increase in the corporate income tax rate from the current 21% to 28%. This would move the U.S. rate from the middle of the
· Decreasing the estate tax exemption to the $3.5 million level from today’s $11.58 million, along with an increase in the estate tax rate from 40% to 45%.
· Applying the Social Security tax on incomes above $400,000, leaving a “donut hole” between $137,700 and $400,000.
· Application of ordinary income tax on capital gains for those making over $1 million per year.
· Capping the tax deduction for those making over $400,000 at 28%.
· Flat tax credit for retirement plan contributions, not tied to one’s income tax rate
· Elimination of basis step-up at death
· Raise the maximum child and dependent tax credit to $8,000 from $3,000 ($16,000 for more than one dependent)
There are other proposals, but these are the key few that advisors might pay attention to, and begin to have conversations with clients about.
Other potential changes to think about:
· Stronger standards of care applied to brokers and potentially insurance advisors. Consumer groups and fiduciary advocates feel that the SEC’s Regulation Best Interest did not go far enough. Under a Democratic-led executive branch, look for a strengthening here, though it would have to overcome much resistance from these regulated entities.
· Tax deduction for advisory/planning fees. Given that consumers probably need this type of professional guidance more than ever, this could happen as part of a grand tax bargain between the two parties.
There are other issues to watch in coming months, but hopefully this gives you a sense of what’s potentially on the horizon for our profession. With divided government, these will either not be addressed at all or change as part of the give-and-take of the legislative process. I’ll be watching closely, and engaged in conversations with policy-makers. As always, I’d love hearing your thoughts about any of these issues impacting advisors and their clients.
