According to the recent Quinnipiac poll, Joe Biden is leading Donald Trump by 15 points – 52% to 37%. Of course, much can happen between now and the election on November 3, but if the trend continues, Mr. Biden will likely become the 46th President of the United States.
Investors are primarily concerned about Mr. Biden’s tax policy. A few of his proposals include raising the top individual tax rate to 39.6% for incomes exceeding $1 million. The long-term capital gains rate would jump to 39.6% from 20% for this cohort. He wants to eliminate the step-up cost basis on estate transfers. For example, let’s say you purchased Amazon for $1, and on the day of your death, it closes at $3,500. Currently, your beneficiaries will inherit Amazon at $3,500, and they will not have to pay any taxes upon receipt. Their stepped-up cost basis is $3,500. Under Biden’s proposal, your beneficiaries would inherit your cost basis of $1, so if they sell it, they’ll have a capital gain of $3,499 per share, and they could be taxed at a rate of 39.6%.
Biden’s proposal will also impact the Social Security Tax. The Social Security tax of 12.4% is capped on incomes up to $137,000. Mr. Biden would extend the tax to those individuals making more than $400,000. He would limit itemized deductions to 28% on high-income earners and raise the corporate income tax rate to 28% from 21%.
Here are a few steps you can take if Mr. Biden wins, and you’re concerned about your taxes increasing.
- Sell your stocks and realize your gains. The top capital gains tax rate is 20%, and for most individuals, it’s 15%.
- Sell your stocks and realize your losses. If you have securities trading in negative territory, realize your losses so you can offset gains at a later date. The current tax code allows you to offset losses and gains dollar for dollar. If you don’t have any capital gains, you can carry your losses forward and write off $3,000 per year until your losses are absorbed.
- Invest in tax-free municipal bonds. If you live in a state with high taxes like California or New York, the tax-free rate can be substantial. For example, a California tax-free bond paying 3%, would be the equivalent of a taxable bond paying 6.3% for an individual in the highest brackets. If you live in a state with an income tax, you must purchase bonds from your state to receive tax-free income. If you live in Texas or Florida, you can buy bonds from any state in the country.
- Limit your stock purchases to your IRA or 401(k). Investing in stocks or stock funds in your IRA will allow you to realize gains without paying taxes. Your dividend income will be free of current taxes as well. However, you will not be able to recognize losses, and when you withdraw money from your IRA, it will be taxed as ordinary income unless it’s a Roth IRA.
- Convert your traditional IRA to a Roth. You’ll experience a bump in taxes this year, but your distributions will eventually be free of taxation. And, if you convert to a Roth, you never have to take out your money unless you need it for living expenses or some other purpose.
- Invest in a Roth 401(k). The Roth 401(k) does not have any income limits, so it is available to all employees. The maximum contribution is $19,500, and if you’re 50 or older, you can add another $6,500. When you leave your employer, you can roll it over to a Roth IRA.
- Invest in collectibles like art, jewelry, watches, cars, or antiques. These items do not generate income, and they may increase in value. Furthermore, they’re easy to transfer from one generation to the next.
- Buy physical gold, silver, or other metals. Like collectibles, precious metals will not produce income, but they can surge higher.
- Buy raw land. Raw land may give you tax breaks like an agricultural or wildlife exemption. Your land will not generate income, but it can grow over time. Unlike collectibles or precious metals, your land will pass by title to your beneficiaries, so it could trigger a tax on the transfer.
- If your estate is large, you can lower it through your annual gift tax exclusion. The IRS allows you to give away $15,000 per person per year. The current lifetime exemption is $11.4 million.
- Donate to charities you support or cherish through a direct gift of cash or stock.
- Use a charitable vehicle like a donor-advised fund or charitable remainder trust to front-load your donations. You will receive a tax deduction based on your gift, and you can defer your distributions to a later date, including your death.
- You do not need to make any changes today. I was talking to a client yesterday about some of these strategies, and she said she could wait until November 4 to make any changes.
The election will occur in 67 days, so you’ll know if you need to make any adjustments to your portfolio before the year is over. I would caution you, however, to make significant changes to your investments regardless of who wins. As you know, politicians have big ideas while on the campaign trail, but most of them rarely make it to the policy stage. And, if Biden wins, it may take months or years before he implements his suggestions.
Lastly, regardless of who you’re voting for, register to vote. Here is a link to Vote.org: https://www.vote.org/
George Washington is the only president who didn’t blame the previous administration for his troubles. ~ Author Unknown
August 28, 2020
Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.
Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor.
 https://poll.qu.edu/national/release-detail?ReleaseID=3666, website accessed August 28, 2020
 https://www.cnbc.com/2020/07/21/heres-what-a-biden-presidency-might-mean-for-your-taxes.html, Darla Mercado, CFP®, August 28, 2020
 https://taxfoundation.org/reviewing-joe-bidens-tax-vision/, Garrett Wilson and Erica York, August 20, 2020