Presidential Policy

Four months ago we wrote a piece about how the markets can potentially predict the presidential election (Presidential Predictor).  The gist of that article is that 87% of the time the S&P 500 has predicted the winner of the election.   If between July 31st and October 31st the index is up, they predict the incumbent candidate will win, if it is negative, it is expected the challenger will win.  Well… during that period the S&P 500 had a -.04% return.  Statistically speaking, that is within the margin of error and essentially flat.  I think that does a great job of summarizing what this week has been like.  Even now on Friday, we might be a little closer to declaring a winner, but not much. 

Since the outcome is still yet to be determined, we wanted to take a second to discuss something that we have been fielding some calls on, Joe Biden’s potential tax plan. This still very early folks, so take this all with a grain of salt as not only would Biden have to win but his plan would have to make its way through congress before we get the final policy.

Long Term Capital Gains

  • Increase top Cap Gains rate from 20% to 39.6%
    • Currently Capital Gains are taxed at 0%, 15% and 20% based upon income.
    • Biden is proposing to move the top rate from 20% to 39.6% for people earning more than $1 million.
      • It is unclear whether this is single or married.

Step Up in Cost Basis

  • As it stands right now beneficiaries who inherit assets get a step up in cost basis when the owner dies. 
    • This means, that if Jeff bought ABC Corp at $100 a share and it was valued at $200 a share when he died, his beneficiaries cost basis would be stepped up from $100 to $200.
      • Biden’s proposal is that there isn’t a step up in cost basis and the beneficiary inherits the original cost basis (In this case $100).  No tax would be due until the beneficiary would sell the asset.
      • Potentially the second part of this is that if you make over $400,000 (again not sure in what capacity) that tax could be due at the time of death.

Retirement Plan Deductibility

  • Right now, every dollar you contribute to a tax deferred vehicle (IRA or 401k) is able to be deducted from your income.
    • Biden is proposing that there be a flat 26% credit/deduction (This isn’t clear) for retirement plan contributions.   This can be a little confusing so let’s work through it.
      • Jeff makes $250,000, is in the 35% tax bracket and is contributing to his 401k
        • Under the current plan, Jeff is seeing a 35% benefit, since every dollar he contributes is that much less tax he is required to pay.
        • With Biden’s proposal, Jeff would receive at 26% credit, lowering his benefit by ~9%
      • Amy makes $50,000 is in the 22% tax backet and is contributing to her 401k
        • Under the current plan, Amy is seeing a 22% benefit, since every dollar she contributes is that much less tax she is required to pay.
        • With Biden’s proposal, Amy would receive a 26% credit, allowing her to see an increased benefit.

Income Tax

  • Increase top tax bracket from 37% to 39.6%
    • Right now, the top tax bracket is 37% for singles earning over $518,400 or married $622,050.
    • Biden has said that he would like to increase that to 39.6% for earners of $400,000 or more.
      • It is unclear whether this is single or married.

Social Security Tax

  • Right now, Social Security Tax is 12.4% split between employees and employers on earnings up to $137,700.
    • Biden’s proposal keeps this the same.  12.4% tax on earnings up to $137,700 and then 0% after until the $400,000 mark, after which the Social Security tax would go back into effect.
      • It is unclear whether this is single or married.

These proposals are still very general and would have to be written into law to actually change anything, but there certainly is the potential for some big impacts that would have to be adjusted for. We will continue to monitor them if they come to pass and will adjust our planning strategies accordingly to make sure you are still making the most of your money.