|By Tim Courtney, Chief Investment Officer|
Even before the election, there was a lot of talk about tax policy. Tax rates and policies are some of the most favorable we’ve seen in years, and we haven’t seen a major policy move taxes broadly higher in nearly three decades.1 However, this is expected to change under the Biden administration, potentially effective in 2022.
The pandemic and shutdowns wrought much economic damage. The government greatly increased spending to address this and appears prepared to maintain a higher level of spending for some time. We all know there is no free lunch though, and talk has turned to tax policy.
While the specifics of a revised tax plan have not been released, we have an idea of where things might be headed. These changes may alter the way we plan and position investments, so we want to review how they might impact the markets and economy.
● Capital gains: Currently, the U.S. federal capital gains tax on investments held longer than one year ranges from 0% to 20% (with a potential 3.8% additional tax for higher earners). However, the current administration has proposed increasing capital gains for at least the highest earners to the top marginal income-tax rate, which currently is 37%.2
This increase might cause investors to sell out of positions this year in an effort to book gains and reposition before the changes take effect which could lead to increased volatility in markets.
● Step-up in basis elimination: There is also discussion that the step-up in basis benefit will be removed. Currently, securities inherited by heirs receive an adjusted cost basis that equals the value of those securities as of the date of death. This results in little to no capital gains if the heir quickly sells the securities. The Biden administration is proposing to tax the unrealized gain at death, regardless of whether the assets are sold.3
This may also encourage property owners who were holding long-term assets they planned to give to heirs to sell in 2021 which might also cause ripple effects in the market and generate volatility. This will also affect financial planning considerations.
● Corporate tax: The corporate tax rate is currently 21%, but the new administration is proposing an increase to 28% which will impact earnings. It is always hard to determine how much of this is already priced into markets, but we should expect again more volatility as stock prices fully factor in lower expected after-tax earnings.4
● Financial transactions tax: In 2019, most major trading platforms eliminated trading fees on stocks and exchange-traded funds (ETFs) which encouraged more investors to participate in the markets, particularly smaller traders.5 The Biden administration is considering adding some friction back into markets by imposing a tax on financial transactions.6 This would potentially affect high-frequency traders the most but could end up changing market mechanics and broad trading behavior in ways that are unclear.
There are several other potential tax changes being discussed in addition to those mentioned above, including modifications to estate tax as well as a possible wealth tax which would almost certainly roil markets – perhaps more than any of the others.7
While we do not know the details of the finalized plan right now, it is something we are closely monitoring so that we are prepared to adjust our financial planning and our portfolio positions if we believe it prudent. As always, if you have any questions, please reach out to your Exencial advisor anytime.
1. Bloomberg (3/15/21) – Biden eyes first major tax hike since 1993 in next economic plan
PAST PERFORMANCE IS NOT AN INDICATION OF FUTURE RETURNS. Information and opinions provided herein reflect the views of the author as of the publication date of this informational piece. Such views and opinions are subject to change at any point and without notice. Some of the information provided herein was obtained from third-party sources believed to be reliable but such information is not guaranteed to be accurate. In addition, the links provided within are for convenience only and the provision of the links does not imply any sponsorship, endorsement, or approval of any of the content. We do not guarantee the content or its accuracy and completeness. The content is being provided for informational purposes only, and nothing within is, or is intended to constitute, investment, tax, or legal advice or a recommendation to buy or sell any types of securities or investments. The author has not taken into account the investment objectives, financial situation, or particular needs of any individual investor. Any forward-looking statements or forecasts are based on assumptions only, and actual results are expected to vary from any such statements or forecasts. No reliance should be placed on any such statements or forecasts when making any investment decision. Any assumptions and projections displayed are estimates, hypothetical in nature, and meant to serve solely as a guideline. No investment decision should be made based solely on any information provided herein and the author is not responsible for the consequences of any decisions or actions taken as a result of information being provided herein. There is a risk of loss from an investment in securities, including the risk of total loss of principal, which an investor will need to be prepared to bear. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be profitable or suitable for a particular investor’s financial situation or risk tolerance. Exencial Wealth Advisors, LLC (“EWA”) is an investment adviser registered with the Securities & Exchange Commission (SEC). However, such registration does not imply a certain level of skill or training and no inference to the contrary should be made. EWA may only transact business in those states in which it is registered, notice filed, or qualifies for an exemption or exclusion from registration or notice filing requirements. Complete information about our services and fees is contained in our Form ADV Part 2A (Disclosure Brochure), a copy of which can be obtained at www.adviserinfo.sec.gov or by calling us at 888-478-1971